When Asserting a Pattern of Racketeering Based upon Injury to Other Victims, Plaintiff must Assert Sufficient Details of the Injury to the Other Victim

AMA Systems LLC et al. v. 3B Tech et al, 2023 WL 5950283 (D. Md., Sept. 6, 2023) 

The Court granted the Defendants’ motion to dismiss a RICO Second Amended Complaint based on the finding that the plaintiffs had not adequately alleged a pattern of racketeering.

Holding:  To assert a pattern of racketeering based upon injury to other victims, the plaintiff must allege sufficient facts and details that show Defendants harmed these other victim companies through predicate acts. 

Facts:

The Second Amended Complaint sets forth six counts: (I) Civil Violation of the RICO, 18 U.S.C. § 1962(c), against all Defendants; (II) Civil Violation of RICO, 18 U.S.C. § 1962(d), By Conspiring to Violate 18 U.S.C. § 1962(c) against all Defendants;

*5 To establish the necessary pattern, a plaintiff must show (1) a relationship between the predicate acts and (2) that they “amount to or pose a threat of continued criminal activity.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989). Stated differently, defendants may be “guilty of RICO violations if they commit two or more acts of mail or wire fraud and the acts are sufficiently related and sufficiently continuous.”

“ ‘Continuity’ is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 241 (1989).

Close-Ended Continuity

In addressing closed ended continuity, Plaintiffs fail to allege facts to suggest that the predicate acts of mail and wire fraud are “part of a prolonged criminal endeavor.” See ePlus, supra; see H.J., Inc., 492 U.S. at 242 (noting that “Congress was concerned in RICO with long-term criminal conduct”); Layani, 2022 WL 294286, at *4 (finding that FAC sufficiently stated a claim where new allegations contained a “number and variety of fraudulent acts…over many years”). Plaintiffs’ detailed allegations suggest a single scheme that began and concluded within six months (late March 2020 to August 2020). 

Like the plaintiffs in Layani, Plaintiffs add some particularity about “the identities and descriptions of some additional victims.” 2022 WL 294286, at *4. Specifically, Plaintiffs allege that “Vonnic, Inc., KC Lin, SP Richards, and MANCON purchased fraudulently certified PPE from Defendants, and have thus been harmed,” however, the allegations are vague as to how, or if, Defendants harmed these companies through predicate acts. 

Open-Ended Continuity

Defendants argue that Plaintiffs fail to allege open-ended continuity because the “allegations fail to identify any concrete injury suffered by a non-plaintiff putative victim of any ongoing criminal or fraudulent activity.”  Accordingly, the alleged scheme must have “the kind of ‘scope and persistence to pose a special threat to social well-being’ that places the alleged pattern of racketeering beyond the ordinary fraud claims consisting of private economic disputes that do not qualify as RICO claims.” 

Although Plaintiffs allege Defendants continued (and continue) to advertise and sell the non-conforming masks beyond April and May of 2020, Plaintiffs fail to allege adequate details regarding the “identity or activity of the other persons purportedly defrauded by the defendant.” 

The court concluded that the vague allegations of activity beyond 2020 are insufficient to suggest that the conduct is ongoing or the presence of a “distinct threat of continuing racketeering activity.”

In re: EpiPen Direct Purchaser Litigation, 2023 WL 2860858, D. Minn. April 10, 2023.

In their operative complaint, Plaintiffs allege violations of sixteen state bribery statutes as direct RICO predicate acts, and violations of the statutes of these and another four other states as RICO predicate acts through the Travel Act. 

Plaintiffs advanced a threshold substantive challenge to Defendants’ motion to dismiss. RICO defines “racketeering activity” to include “any act or threat involving … bribery … which is chargeable under State law and punishable by imprisonment for more than one year.” 18 U.S.C. § 1961(1)(A). Plaintiffs characterize Defendants’ motion as challenging the “chargeability of various statutory commercial bribery offenses under the law of the various states supplying the offense” and argue that “attacking whether a particular offense could be charged by a prosecutor in the state whose law supplies the offense is not a permitted argument in a RICO case.”

As support for this argument, Plaintiffs rely principally on United States v. Carrillo, 229 F.3d 177 (2d Cir. 2000) wherein the Second Circuit explained that “the phrase ‘chargeable under State law’ does not require that the particular underlying conduct at issue could have been charged under state law, only that such conduct be chargeable as a general matter; i.e., that such conduct is criminal under state law.”  Though there is room for misunderstanding, Plaintiffs seem to understand Carrillo—and the Eighth Circuit by extension in Kehoe—to hold that a civil-RICO plaintiff need not allege facts plausibly showing the elements of an underlying state bribery offense, meaning any challenge to a plaintiff’s failure to plead such facts would be pointless.

This argument is not persuasive. (1) Carrillo doesn’t support it. Carrillo was a criminal case, meaning it could not and did not address civil-RICO pleading requirements. And if anything, Carrillo’s core criminal-RICO holdings support the notion that a civil-RICO plaintiff must plead facts plausibly showing each element of any alleged state-law racketeering act. The relevant issue in Carrillo was whether the district court’s jury instructions were deficient because they did “not list the state law elements of the constituent racketeering acts.” 229 F.3d at 181; see also id. at 182 (“The Government, in response, argues that in a RICO prosecution, the court need not charge each element of the state law crimes constituting the predicate racketeering acts.”). The court held that a prosecutor must prove, and a district court generally should instruct the jury regarding, all elements of a predicate state-law offense.  The court drew a line between, on the one hand, Congress’s intent not to incorporate state procedural and evidentiary rules into § 1961(1)(A)’s use of “chargeable” and, on the other, the need for a prosecutor to prove each element of a state-law racketeering act. Id. at 183. The court explained: “Refusal to incorporate state procedural and evidentiary requirements has no logical bearing on the issue whether in a federal RICO prosecution the government must prove the elements of the state law offense that serves as a predicate racketeering act.” Id. 

The court concluded that if a RICO plaintiff seeks to allege racketeering activity through the commission of state statutory offenses, then it only makes sense that the plaintiff must allege facts plausibly showing the commission of those offenses—that is, each element of each identified state statutory offense. Fed. R. Civ. P. 8(a). 

Heinrich v. Dean, ___ F.Supp.3d ___, 2023 WL 1967130 (S.D.N.Y. Feb. 13, 2023)

In a primer on enterprise, the Court dismissed the plaintiffs RICO complaint with prejudice after finding that an adequate enterprise was not alleged.  Plaintiffs allege that Dean and Yassim acted as an association-in-fact enterprise from 2014 through the present to commit criminal acts including mail fraud, wire fraud, and bank fraud.  The purpose of the enterprise was to induce Muzio, Heinrich, and other family members to believe that Dean was a trusted caregiver so the enterprise could exploit Muzio and convert Plaintiffs’ property for their own benefit.

Association in Fact Enterprise

A RICO enterprise must be “distinct from the person conducting the affairs of the enterprise. The enterprise must also exist “separate and apart from the pattern of activity in which it engages.”  The court found that the Plaintiffs failed to adequately to allege the sine qua non of a civil RICO claim: that there was an enterprise that was engaged in racketeering activity.

Plaintiffs assert for the first time in their memorandum of law that Dean and Yassim “created an enterprise in the form of an eldercare service which operated as a cover for their fraud and thievery….” Dean’s purported role in the enterprise was to exploit her position as Muzio’s caregiver, while Yassim’s role was to gain control over Muzio’s accounts by ingratiating himself to Barker. 

 The gravamen of the Complaint is that Dean and Yassim defrauded Muzio of her assets to further their own interests, not the interests of a separate eldercare enterprise. See D. Penguin Bros. Ltd., 587 F. App’x at 666 (concluding that allegations that two individuals “worked together in some respects to steal plaintiffs’ funds” were insufficient to allege a civil RICO enterprise because, inter alia, there was no plausible basis for inferring that the defendants had acted “on behalf of the enterprise as opposed to on behalf of [themselves] in their individual capacities, to advance their individual self-interests”); see also Foster v. 2001 Real Estate, No. 14-CV-9434 (RWS), 2015 WL 7587360, at *4 (S.D.N.Y. Nov. 24, 2015) (concluding that an “offhand reference to an ‘Enterprise’ ” when alleging that the defendants “conspired together to defraud” someone was insufficient to state a civil RICO claim).  

The court found that there was no plausible basis to infer that its members formed an ongoing organization and acted on its behalf. Assigning Dean and Yassim purported roles in the enterprise does not cure this fatal deficiency. See Moss v. BMO Harris Bank, N.A., 258 F. Supp. 3d 289, 304 (E.D.N.Y. 2017) (concluding that “describing the roles” entities played within the purported enterprise was insufficient to allege a RICO enterprise); Wade Park Land Holdings, LLC v. Kalikow, 589 F. Supp. 3d 335, 375 (S.D.N.Y. 2022) (rejecting plaintiffs’ argument that they “allege[d] each defendant’s role in the enterprise” because their allegations were merely “conclusory”).

Plaintiffs also fail to state a RICO claim because the purported eldercare “enterprise” and Dean, the only individual who allegedly engaged in eldercare, are one and the same. Plaintiffs therefore run afoul of the well-established rule that a RICO enterprise must be “distinct from the person conducting the affairs of the enterprise.” First Capital Asset Mgmt., Inc., 385 F.3d at 173 (citations omitted); see also Kerik v. Tacopina, 64 F. Supp. 3d 542, 543 (S.D.N.Y. 2014) (“Even when the plaintiff is alleging an ‘association-in-fact’ enterprise, the enterprise must have a distinct identity from the RICO person and consist of more than one member.”) (citation omitted).

The Complaint also falls short because it does not sufficiently allege an enterprise that is “separate and apart from the pattern of activity in which it engages.” Turkette, 452 U.S. at 583, 101 S.Ct. 2524. Plaintiffs allege that Dean provided eldercare services and that Yassim helped Dean defraud one particular client: Muzio.  The extent of Dean and Yassim’s purported enterprise is their criminal activity with respect to Muzio, the very “pattern” of activity underlying Plaintiffs’ RICO claim.

For those reasons, and because Plaintiffs have neither requested leave to amend nor indicated that they could amend their Complaint to correct these deficiencies, Plaintiffs’ civil RICO claim was DISMISSED with prejudice. 

Douglas v. Hirshon, __F.4th __, 2023 WL 2582295 (1st Cir., March 21, 2023)

The court affirmed the lower court’s ruling that plaintiffs did not adequately facts to support a finding that defendants Hirshon and LOSU conspired to violate RICO in violation of section 1962(d).  Joel Douglas, Steven Fowler, and James Lewis sued twenty-six defendants, alleging several interrelated schemes to defraud the plaintiffs of real estate in Maine. Among other claims, the complaint asserts that, in connection with these schemes, a subset of the defendants participated in a conspiracy in violation of RICO that this conspiracy injured the plaintiffs. The district court had also granted the motion to dismiss and denied the motion for limited discovery in a written opinion issued September 29, 2021.

With respect to the RICO count, the complaint alleged that Hirshon and LOSU “knew about the fraud committed by the [RICO e]nterprise because of their participation in the transactions for 661 Allen Avenue and 75 Queen Street,” and that they, alongside other defendants, “realized the proceeds” of the schemes.  Count IV of the complaint asserts that Hirshon and LOSU, together with numerous other defendants, participated in a RICO conspiracy to violate § 1962(a) by investing funds obtained through the alleged fraud schemes into efforts to defraud additional victims. To state a claim on this count with respect to Hirshon and LOSU, the complaint must plausibly allege, among other things, that they knowingly joined the purported RICO conspiracy. The Court agreed with the district court that the complaint failed to do so.

As the district court observed, the complaint “contains scant details regarding Hirshon’s and LOSU’s participation” in the alleged conspiracy.  The conclusory assertion that Hirshon and LOSU “knew about the fraud … because of their participation in the transactions for 661 Allen Avenue and 75 Queen Street” is “too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture.” . The complaint alleges a complex series of transactions, many of which — such as a titleholder’s taking out a mortgage on a property — are unremarkable. No inference can reasonably be drawn from the mere fact of these transactions that those involved knowingly participated in fraud.

The court stated that stripping out this conclusory statement, the remaining allegations against Hirshon and LOSU assert that they in some unspecified way participated in transactions involving 661 Allen Avenue and 75 Queen Street; that they in some unspecified way benefitted financially from Lalumiere’s transactions; and that LOSU acquired a mortgage on a different property, 36 Settler Road, from a corporation controlled by Lalumiere while having notice that the corporation had entered into a lease/buy-back agreement with Davis. The Court stated that these sparse allegations fall well short of “plausibly narrat[ing] a claim for relief” stating it could not “draw [a] reasonable inference that the defendant[s are] liable for the misconduct alleged.”  Because the plaintiffs’ allegations do not support a reasonable inference that Hirshon or LOSU knowingly joined the alleged RICO conspiracy, the district court properly concluded that the complaint fails to state a claim against these defendants.

Clinton v. Security Benefit Life Ins. Co., ___F. 4th ___, 2023 WL 2657306 (10th Cir., March 28, 2023)

The 10^th Circuit reversed the lower court finding that plaintiffs adequately alleged facts to support mail and wire fraud predicates in a civil RICO fraud claim. The court discussed that to state a claim for mail and wire fraud, plaintiffs must “plausibly allege ‘the existence of a scheme or artifice to defraud or obtain money or property by false pretenses, representations or promises.’ ” “[T]he central focus of the first element [of mail and wire fraud] is the existence of a scheme.”  A ‘scheme or artifice to defraud’ ‘connotes a plan or pattern of conduct which is intended to or is reasonably calculated to deceive persons of ordinary prudence and comprehension.’ ”  (“[T]he first element of wire [and mail] fraud is a scheme to defraud and that element includes a scheme to obtain property by means of false or fraudulent pretenses, representations, or promises ….”).

The court discussed that intent to defraud” under §§ 1341 and 1343, the second element of a mail and wire fraud scheme, may be established “by various means.” “Sections 1341 and 1343 reach any scheme to deprive another of money or property by means of false or fraudulent pretenses, representations, or promises.”. For instance, we have held that a scheme to defraud may involve the use of “material misrepresentations,” or “knowledge of a false statement” Determining that “[i]ntent to defraud” under § 1341 “may be inferred from the defendant’s misrepresentations [or] knowledge of a false statement” (citations omitted)). Not every scheme to defraud will involve an affirmative falsehood. (“A scheme to defraud focuses on the intended end result and affirmative misrepresentations are not essential ….” [I]t is not necessary for a plaintiff to point to affirmative misstatements in order to establish the requisite fraudulent intent of a defendant under the mail and wire fraud statutes.” (citation omitted)); Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1415 (3d Cir. 1991) (“The [mail fraud] scheme need not involve affirmative misrepresentation ….” (citation omitted)).

A ”misleading omission” also may establish the intent to defraud under the mail and wire fraud statutes. “Fraudulent intent is required under the statute, and ‘deceitful concealment of material facts may constitute actual fraud.’ ” (citation omitted)). A fiduciary relationship between parties “can trigger a duty of disclosure as can some other relationship of trust and confidence between the parties,” and when such a relationship exists “certain people must always disclose facts where nondisclosure could result in harm.”  But “[e]ven apart from a fiduciary duty … ‘a misleading omission[ ] is actionable as fraud’ ” under the mail and wire fraud statutes “if it is intended to induce a false belief and resulting action to the advantage of the misleader and the disadvantage of the misled.”  “While the existence of a fiduciary duty is relevant and an ingredient in some mail fraud prosecutions, it is not an essential in all such cases. … [F]raudulent representations … may be effected by deceitful statements of half-truths or the concealment of material facts ….” (footnote omitted) (citations omitted)). 

Here, Plaintiffs claim reversal is required because the district court misconstrued the four misrepresentations and omissions it specifically analyzed and ignored other related allegations.  Plaintiffs contend the complaint sufficiently pleaded Security Benefit induced Plaintiffs to purchase the annuity products through “materially false and misleading representations and half-truths.” According to Plaintiffs, the complaint, when taken as a whole, plausibly alleged Security Benefit engaged in a scheme to defraud by materially misrepresenting the “performance dampening features” of its annuity products and failing to disclose the collective impact of these features on Plaintiffs’ investments. 

The Circuit court thus found the district court failed to consider the complaint as a whole, and its analysis of the four misrepresentations and omissions in isolation reveals it did not fully account for Security Benefit’s misrepresentations about the discrete features of the annuity products that, together, operated to reduce the proprietary indices’ performance.

RICO Is to Be Construed Broadly The court further discussed that RICO is to be read broadly, and statute’s remedial purposes are nowhere more evident than in the provision of a private action for those injured by racketeering 

The First Circuit found that Plaintiff’s allegations that Defendants Were Civil RICO Conspirators Were Insufficient and Fell Well Short of “Plausibly Narrating a Claim for Relief”

Douglas v. Hirshon, __F.4^th __, 2023 WL 2582295 (1^st Cir., March 21, 2023)

The First Circuit found that Plaintiff’s allegations that Defendants Were Civil RICO Conspirators Were Insufficient and Fell Well Short of “Plausibly Narrating a Claim for Relief”

The court affirmed the lower court’s ruling that plaintiffs did not adequately facts to support a finding that defendants Hirshon and LOSU conspired to violate RICO in violation of section 1962(d).  Joel Douglas, Steven Fowler, and James Lewis sued twenty-six defendants, alleging several interrelated schemes to defraud the plaintiffs of real estate in Maine. Among other claims, the complaint asserts that, in connection with these schemes, a subset of the defendants participated in a conspiracy in violation of RICO that this conspiracy injured the plaintiffs. The district court had also granted the motion to dismiss and denied the motion for limited discovery in a written opinion issued September 29, 2021.

With respect to the RICO count, the complaint alleged that Hirshon and LOSU “knew about the fraud committed by the [RICO e]nterprise because of their participation in the transactions for 661 Allen Avenue and 75 Queen Street,” and that they, alongside other defendants, “realized the proceeds” of the schemes.  Count IV of the complaint asserts that Hirshon and LOSU, together with numerous other defendants, participated in a RICO conspiracy to violate § 1962(a) by investing funds obtained through the alleged fraud schemes into efforts to defraud additional victims. To state a claim on this count with respect to Hirshon and LOSU, the complaint must plausibly allege, among other things, that they knowingly joined the purported RICO conspiracy. The Court agreed with the district court that the complaint failed to do so.

As the district court observed, the complaint “contains scant details regarding Hirshon’s and LOSU’s participation” in the alleged conspiracy.  The conclusory assertion that Hirshon and LOSU “knew about the fraud … because of their participation in the transactions for 661 Allen Avenue and 75 Queen Street” is “too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture.” . The complaint alleges a complex series of transactions, many of which — such as a titleholder’s taking out a mortgage on a property — are unremarkable. No inference can reasonably be drawn from the mere fact of these transactions that those involved knowingly participated in fraud.

The court stated that stripping out this conclusory statement, the remaining allegations against Hirshon and LOSU assert that they in some unspecified way participated in transactions involving 661 Allen Avenue and 75 Queen Street; that they in some unspecified way benefitted financially from Lalumiere’s transactions; and that LOSU acquired a mortgage on a different property, 36 Settler Road, from a corporation controlled by Lalumiere while having notice that the corporation had entered into a lease/buy-back agreement with Davis. The Court stated that these sparse allegations fall well short of “plausibly narrat[ing] a claim for relief” stating it could not “draw [a] reasonable inference that the defendant[s are] liable for the misconduct alleged.”  Because the plaintiffs’ allegations do not support a reasonable inference that Hirshon or LOSU knowingly joined the alleged RICO conspiracy, the district court properly concluded that the complaint fails to state a claim against these defendants.

Zanghi v. Callegari, 2023 WL 1097560 (2d Cir., Jan. 30, 2023)

Second Circuit Lacked Appellate Jurisdiction to Review Appellant’s Interlocutory Appeal From An  Order Dismissing a Civil RICO Claim

Appellants Zanghi and Zanghi LLC appealed from the district court’s September 24, 2021 order dismissing a civil RICO claim against Defendant-Appellee Callegari and a January 7, 2022 order declining to exercise supplemental jurisdiction over a state-law claim against Callegari. In this interlocutory appeal, Zanghi argues that the court has appellate jurisdiction to review the orders pursuant to 28 U.S.C. § 1291 or the collateral-order doctrine, and that both were erroneous.  

This court concluded that it lacked appellate jurisdiction to review Zanghi’s interlocutory appeal from the district court’s September 24, 2021 and January 7, 2022 orders. Under 28 U.S.C. § 1291, “[t]he courts of appeals … have jurisdiction of appeals from all final decisions of the district courts.” Under the final-judgment rule, “a party is entitled to a single appeal, to be deferred until final judgment has been entered, in which claims of district court error at any stage of the litigation may be ventilated.”  To determine whether a district court’s order is “final,” we apply a “pragmatic, nontechnical ‘approach to the question of finality.’

Under the collateral-order doctrine, “only decisions [1] that are conclusive, [2] that resolve important questions separate from the merits, and [3] that are effectively unreviewable on appeal from the final judgment in the underlying action” may be appealed before final judgment. 

The appeals court first found the September 24, 2021 and the January 7, 2022 orders are not appealable “final decisions of the district court[ ]” under the final-judgment rule. 28 U.S.C. § 1291. The district court’s September 24, 2021 order dismissed claims against some parties but retained some of Zanghi’s securities-fraud and state-law claims. And while the January 7, 2022 order dismissed the remaining state-law claim against Callegari, it did not dismiss any other surviving claims against other defendants. Moreover, proceedings are still pending before the district court, underscoring that neither order terminated Zanghi’s action. The January 7, 2022 order dismissed the only remaining claim against one defendant (Callegari) in a multi-defendant action; it was not a dismissal of a discrete case consolidated with others in a multidistrict litigation. Thus, neither order was a “final decision” appealable under § 1291.

Second, the Court found the September 24, 2021 and January 7, 2022 orders do not fall within the collateral-order doctrine because, as a categorical matter, neither raises “important questions separate from the merits.”  The court stated that  “[E]ven if a particular appeal satisfies the three conditions” of the collateral-order doctrine, “we still lack jurisdiction if the appeal is of a type that does not generally fall within the doctrine.”  The Court concluded that following the categorical analysis above, neither the September 24, 2021 order nor the January 7, 2022 order is an appealable order under the collateral-order doctrine.

Finally, the Court stated that the lack of appellate jurisdiction over the January 7, 2022 order renders moot Zanghi’s request for pendent appellate jurisdiction over the September 24, 2021 order. (“[P]endent appellate jurisdiction is only appropriate where an issue is ‘inextricably intertwined’ with the other issues on appeal giving rise to the appellate court’s jurisdiction or is necessary to ensure ‘meaningful review’ of those issues.”). Without any basis for appellate jurisdiction, this court must dismiss Zanghi’s appeal.

The court also rejected Zanghi’s alternative request, which we construe as a motion for leave to file a petition for a writ of mandamus as Zanghi failed to satisfy the conditions before the writ may issue,  (1) the petitioner must have no other adequate means to attain the relief it desires; (2) the petitioner must satisfy the burden of showing that its right to issuance of the writ is clear and indisputable; and (3) the issuing court must be satisfied that the writ is appropriate under the circumstances.”  The court found availability of other avenues by which Zanghi could seek the desired relief, however, we are unconvinced that issuance of a writ of mandamus would be appropriate.

Ninth Circuit Affirms Dismissal of RICO Claim Finding Lack of Jurisdiction and Failure to Satisfy Statutory Standing

Limaco v. Wynn, 2023 WL 154965 (9^th Cir., Jan. 11. 2023) 

Appellant Angelica Limcaco appeals the dismissal of her civil claim brought under RICO and the 9^th Circuit affirmed.

Limcaco sued in federal district court in California under RICO. The core of Limcaco’s claim is that Appellees illegally influenced the appointment of WLV’s counsel, Elayna Youchah, as a magistrate judge in the District of Nevada where the Nevada Matter was pending.  She contends that Appellees were part of a RICO conspiracy to protect Wynn casino gaming licenses and that losing the Nevada Matter would threaten those licenses.

First, the district court properly determined that it lacked personal jurisdiction over Buckley. “[M]ere injury to a forum resident is not a sufficient connection to the forum.” Walden v. Fiore, 571 U.S. 277, 290 (2014). “The proper question is not where the plaintiff experienced a particular injury or effect but whether the defendant’s conduct connects him to the forum in a meaningful way.” Id. Limcaco failed to allege that Buckley directed any conduct at California or that her claims arise out of that purposeful direction. 

Second, the district court also properly determined that nationwide service of process under 18 U.S.C. § 1965(b) was inappropriate. Nationwide service under § 1965(b) requires a court to have personal jurisdiction over at least one of the participants, no other district to be able to assert personal jurisdiction over all the alleged co-conspirators, and facts showing the existence of a multidistrict conspiracy encompassing defendants.  Limcaco’s bare assertions that “there is no indication” that Nevada has jurisdiction over ML Strategies, or that Massachusetts had jurisdiction over Buckley, do not establish that § 1965(b) applies, particularly when the First Amended Complaint’s (FAC) primary theory is that all the purported bad actors were engaged in a scheme aimed at assisting a Nevada entity in securing gaming licenses in Massachusetts.

Third, Limcaco similarly failed to satisfy statutory standing under RICO because she fails to allege an injury to business or property through a RICO violation.  Limcaco asserts injuries under theories of honest services fraud, loss of chance to pursue her claim (the Nevada Matter), lost damages from the Nevada Matter, and legal fees. The district court did not err in concluding that “deprivation of honest services alone does not constitute concrete financial loss for purposes of pleading RICO’s statutory standing requirement.” Additionally, Limcaco’s assertion that she suffered injury from the lost ability to pursue her claim is not concrete nor financial because she litigated the Nevada Matter before the district court and this court on appeal.  Limcaco’s lost damages claim similarly fails because it presupposes success on the merits, which were never addressed.

Lastly, Limcaco cites no case in which this court has ever recognized the inurement of legal fees as a cognizable injury under RICO.  Even if legal fees could be a cognizable interest as “deprivation[s] of money,” Limcaco’s assertions still fail to be sufficiently financial or concrete. Next, Limcaco cannot establish any injury “by reason of” a RICO violation because she cannot show that Appellees’ conduct was the but-for or proximate cause of any injury.  Limcaco’s complicated theory of causation turns on a “cascading chain of events” spanning multiple years and involving several third parties. Limcaco does not adequately allege that, but-for the Appellees’ unlawful conduct in elevating Youchah, her injury would not have occurred because the district court dismissed her claim as time barred, and we affirmed that dismissal on appeal. Similarly, Limcaco fails to sufficiently allege proximate causation because her allegations are conditioned on several independent events² and do not show that “the alleged violation led directly to the plaintiff’s injuries.” 

Appellants Could Not Allege Injury From Illegal Drug Dealing As Court Finds Congress did not intend the term “business or property” in RICO to include Illegal Activity

Schulman v. Kaplan, __ 4^th __, 2023 WL 225625 (9^th Cir., Jan. 18, 2023)

Although the court stated it had appellate jurisdiction over this case pursuant to 28 U.S.C. § 1291, i.e., Article III standing, appellants lacked statutory standing under RICO..

Appellants sued Appellees in federal district court, asserting dozens of claims, two of which arise under RICO. The district court granted Appellees’ motion to dismiss with prejudice, holding that Appellants lacked standing to bring their RICO claims.

After finding that hat Appellants had Article III standing, the court considered whether

Appellants have statutory standing to bring their RICO claims. See Canyon Cnty. v. Syngenta Seeds, Inc., 519 F.3d 969, 974 n.7 (9th Cir. 2008).  The court has recognized that to establish statutory standing pursuant to RICO, 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, which requires the plaintiff to establish proximate causation.” 

Here, Appellants allege that Appellees devised a racketeering scheme to defraud them, committed acts of mail and wire fraud, and injured them in “their business and property, because their moneys, profits, and property” from their cannabis enterprise “have been wrongly diverted to and converted by Defendants.”  It is therefore clear from the face of the complaint that Appellants’ claimed injury arises pursuant to RICO Section 1964(c). Accordingly, for Appellants to establish RICO standing, the statute’s use of the term “business or property” must encompass businesses and property engaged in the cultivation, sale, and marketing of cannabis—an enterprise that is legal under California law, but illegal under federal law.

The text of RICO does not define either “business” or “property.” For this reason, courts usually look to state law to determine whether a particular interest amounts to property. Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc) (“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.”) (emphasis added). California law, unlike federal law, recognizes licensed cannabis businesses as well as a property interest in cannabis. 

The court observed that numerous courts have held that state law does not control where RICO’s statutory purpose or congressional intent in enacting the statute conflicts with the relevant state law thus presenting the following question: do either the statutory purpose of RICO or the congressional intent animating its passage conflict with the California laws recognizing a business and property interest in cannabis? We conclude that they do.

Because RICO’s definition racketeering activity necessarily encompasses dealing in cannabis, it would be inconsistent to allow a business that is actively engaged in cultivation of and commerce in cannabis to recover damages under RICO for injury to that business. The court found that since RICO and the CSA were enacted almost contemporaneously, it is clear that Congress did not intend the term “business or property” in RICO to include cannabis businesses or property. Congress enacted RICO as part of a comprehensive legislative package aimed at combating the influence of organized crime on interstate commerce. S. Rep. No. 91-617, at 76 (1969). Considering the laws in tandem, it is evident that Congress would have considered a cannabis business to be a form of organized crime and that Congress would not have intended RICO to provide damages for injury to interests in which it explicitly disclaimed the existence of any property rights.

Although some states, such as California, have changed their legal regimes pertaining to the use, cultivation, distribution, and sale of cannabis since the enactment of RICO and the CSA, these activities are still clearly illegal under federal law. Congress could not have intended to allow a drug dealer to recover RICO damages from someone who, by mail and wire fraud, stole a shipment of the drug.  Otherwise, RICO would serve to protect the same variety of conduct it was intended to combat.

For these reasons, the court held that Appellants lacked a statutory right to bring a claim under RICO and the district court’s order dismissing Appellants’ RICO claims is upheld.

Circuit Court Affirms Lower Court Decision Dismissing a RICO Claim, but Judge Bacharach Dissents

Johnson v. Heath, __4^th__, 2022 WL 17971709 (10^th Cir. Dec. 28, 2022)

This case arises from a business deal gone sideways. Defendants Michael and Dawn Heath sold Plaintiff Harry Johnson a gasoline and automobile-service station in Wells, Nevada. But soon after the sale, Plaintiff allegedly discovered that the property had material, undisclosed defects and that Defendants had artificially inflated the business’s profits by scamming customers over the years.

Defendants tricked some customers into believing that Defendants were selling gasoline at the less expensive propane price. Twenty-four customers filed complaints about this alleged practice. Besides their alleged customer scams, Defendants allegedly performed little maintenance on the property, leaving the gasoline storage tanks, propane tanks, and sewage system in disrepair. In 2013, Defendants decided to sell the Wells station and allegedly inflated the profitability data by basing it on revenue from overcharging the customers. Defendants also allegedly failed to disclose that they spent little revenue on necessary repairs to the property, further inflating the property’s value.

Defendants also bought a gas and service station in New Harmony, Utah, which they currently operate. Defendants have allegedly continued to charge customers for unnecessary tires and automobile repairs at the New Harmony station.

Plaintiff sued Defendants in the District of Utah, asserting nine state-law claims and a federal RICO claim against Defendant Michael Heath alleging Heath ran his company, Heath Enterprises Inc., as a racketeering scheme Plaintiff calls “burning the station.” The district court dismissed the RICO claim for failure to state a claim and declined to exercise supplemental jurisdiction over Plaintiff’s remaining state claims. Defendants then moved for attorney’s fees, which the district court denied.

Plaintiff alleged that Defendant Michael Heath conducted the affairs of Heath Enterprises Inc., an enterprise, through a pattern of wire fraud, bank fraud, and access-device fraud—crimes that § 1961(1) classifies as racketeering activity. According to Plaintiff, Defendant committed these crimes by fraudulently inducing customers to use their credit cards to buy gasoline and services and then fraudulently inducing Plaintiff to buy the station for more than it was worth. Plaintiff alleged that these predicate crimes formed the RICO pattern. 

The Court agreed with the district court that even assuming Plaintiff adequately alleged predicate racketeering acts, he failed to state a RICO claim because he did not adequately allege a RICO pattern.

Relatedness: 

Plaintiff alleges the following predicate acts: the fraudulent sale of the Wells station to him, the fraudulent charges to customers of the Wells station, and the fraudulent charges to customers of the Elko and New Harmony stations. We agree with the district court that the predicate acts involving the Wells Station relate to each other. Plaintiff alleged that the fraudulent charges to the customers of the Wells station were part of a broader scheme to fraudulently sell the station to Plaintiff at an inflated price. According to Plaintiff’s allegations, Defendants defrauded the Wells-station customers so that the station would seem more profitable to a purchaser of the station. Thus, the fraudulent sales to the customers of the station and the fraudulent sale of the station to Plaintiff made up a common scheme, had similar purposes, and were interrelated under the loose relationship standard.

Open-Ended Continuity

Plaintiff alleged that Defendants operated the Wells station for about eleven years. In that span, Defendants allegedly scammed at least twenty-four customers by tricking them into thinking the propane price applied to gasoline. Defendants also allegedly fraudulently overcharged at least twenty-five customers for gasoline, tires, or automobile repairs. And then Defendants allegedly fraudulently sold Plaintiff the station. Plaintiff argues that each fraudulent transaction constituted a RICO predicate and that the RICO predicates are a regular way Defendants conduct their business—thus establishing open-ended continuity. Although Plaintiff alleged some unrelated fraudulent sales at the Elko and New Harmony stations, he failed to connect those sales to any similar scheme to “burn the station.” Thus, Plaintiff failed to allege that “burning the station” presents Defendants’ regular way of conducting business or that it threatens future repetition.*4.

Closed-Ended Continuity

We thus consider two factors when determining the existence of closed-ended continuity—the duration of the related predicate acts and the extensiveness of the racketeering scheme. Id. at *4, citing cases. Although the majority agreed that duration existed, it noted that duration alone may not establish closed-ended continuity—we also consider the extensiveness of the alleged racketeering scheme in which they consider “the number of victims, the number of racketeering acts, the variety of racketeering acts, whether the injuries were distinct, the complexity and size of the scheme, and the nature or character of the enterprise.”  No factor is required or dispositive; the factors merely guide us in seeking “a natural and commonsense result.” 

Analyzing these factors, the court found the scheme Plaintiff alleged—a scheme to inflate the value of a single property by overcharging some customers and then selling that property to an unwitting buyer without disclosing needed repairs—was neither large nor complex. Id.  But Plaintiff alleged that Defendant has performed this scheme only once. Although Plaintiff alleged that Defendant overcharged customers at the Elko and New Harmony stations, Plaintiff failed to allege that any of those transactions formed part of a similar scheme to “burn” those stations. Thus, the court concluded that Plaintiff alleged only a single scheme with the discrete goal of “burning” the Wells station—inflating its value and dumping it off on an unsuspecting buyer. Id. at 6.

Dissent

Judge Bacharach however stated that the dismissal should have been overturned because in his  view, however, the district court should have considered the allegations that Mr. Heath had inflated profits by cheating customers of the gas station. Unlike the majority, I believe that these allegations establish continuity. *8.   The Judge found that Mr. Heath allegedly deceived not only customers but also Mr. Johnson through electronic communications–• containing false information about the profitability of the gas station and• failing to disclose defects in the gas station’s fuel tanks and sewer system.

The Judge found that Mr. Johnson adequately pleaded wire fraud through misrepresentations to customers.*10. The majority failed to apply the party-presentation rule and misapplies the standards for dismissal and closed-ended continuity.

Though the majority discounts the extent of the scheme, Mr. Heath never questioned satisfaction of this factor. In district court, Mr. Heath challenged closed-ended continuity based only on the lack of “any viable predicate criminal acts.”. And on appeal, Mr. Heath argued only that the allegations had amounted to “common-law fraud” rather than “RICO fraud.” But Mr. Heath has never questioned the extent of the alleged scheme.  Because Mr. Heath hasn’t questioned the extent of the alleged scheme, I don’t think we should, for “we don’t typically ‘craft[ ] arguments for affirmance completely sua sponte and, more specifically, without the benefit of the parties’ adversarial exchange.’ ”

Also, by denying continuity based on extensiveness, the majority overrides the most important factor: duration. Although the extent of the scheme is also pertinent, we should generally focus on whether the wrongful acts are “sporadic” or part of a greater pattern.  As a result, closed-ended continuity is often found whenever the duration is sufficient.  At the motion-to-dismiss stage, the Judge questioned how we can shoehorn Mr. Johnson’s allegations into a single scheme directed at a single individual. 

The Judge stated that even when the predicate acts “arise under a single scheme,” closed-ended continuity may exist when the conduct reflects a regular way of conducting business.*  Editor Note:   Pattern is complex, and courts have usually followed the “regular way of conducting business” as a factor in determining whether there is open-ended continuity, not closed-ended continuity.  See H.J. Inc. 492 U.S. at 493.   Accordingly, I would not base a finding of closed-ended continuity on regular way of doing business, as the dissent implies, but rather argue that the factors showing ‘extensiveness’ as the dissent implies, but rather argue that the factors showing ‘extensiveness’ are sufficient to show closed-ended continuity in this case.