Second Circuit States Position Regarding Legal Entity RICO Persons and “Distinctness;” Reaffirms Kushner when RICO Person/Defendant is An Individual

U1it4less, Inc. v. Fedex Corporation, ___ F.3d ___, 2017 WL 4103869 (Sept. 18, 2017)

In this important case, the Second Circuit affirmed the lower court’s granting of Defendant FedEx’s summary judgment motion which dismissed the Plaintiff U1it4less (BikerGear) substantive RICO claims because BikerGear failed to adduce evidence that FedEx Corp. and FedEx Services, corporate entities, the alleged RICO “persons,” are distinct from FedEx Ground, the alleged RICO “enterprise.”
BikerGear, an internet retailer of motorcycle gear, accused FedEx Corporation and its subsidiaries FedEx Corporate Services, Inc. and FedEx Ground Package System, Inc. of fraudulently marking up the weights of packages shipped by BikerGear and overcharging BikerGear for Canadian customs.
District Court
Judge Forrest held that the mere fact of separate incorporation was not enough to satisfy the requirement that the RICO “person” and “enterprise” be distinct. In addition, Judge Forrest concluded that BikerGear’s RICO claims required a showing that the separate incorporation of FedEx Ground facilitated the racketeering enterprise allegedly run by FedEx Corp. and FedEx Services. Because the evidence showed only that BikerGear “interacted with FedEx Ground and FedEx Services precisely as it would have had those sister subsidiaries in fact been divisions of a single FedEx corporation,” Judge Forrest concluded that there was “no genuine question as to whether FedEx Corp. and FedEx Services are distinct from FedEx Ground for purposes of the RICO claims.”
Second Circuit Analysis of Distinctness
Though Congress initially enacted the RICO statute to target organized crime, the Supreme Court in Cedric Kushner, 533 U.S. at 164, has since identified the statute’s basic purposes as “both protect[ing] a legitimate ‘enterprise’ from those who would use unlawful acts to victimize it and also protect[ing] the public from those who would unlawfully use an ‘enterprise’ (whether legitimate or illegitimate) as a vehicle through which unlawful activity is committed.” Id., at *4 (emphasis added). (the “victim” and “vehicle” criterions). Note: Usually, this means that a legal entity is the enterprise which is victimized, and the association in fact which is used as the vehicle.

BikerGear argued that the mere fact of separate legal incorporation satisfies the distinctness requirement under Section 1962(c). The court disagreed stating that because “a corporate person cannot violate the statute by corrupting itself,” Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 (2d Cir. 2013) (citing Bennett, 770 F.2d at 315), so “if a corporate defendant can be liable for participating in an enterprise comprised only of its agents—even if those agents are separately incorporated legal entities—then RICO liability will attach to any act of corporate wrong-doing and the statute’s distinctness requirement will be rendered meaningless.” Id., at *5, citing to In re ClassicStar Mare Lease Litig., 727 F.3d 473, 492 (6th Cir. 2013) (citing Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994)).

Accordingly, a plaintiff [corporate entity] may not circumvent the distinctness requirement “by alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant,” Riverwoods, 30 F.3d at 344—that consists, in other words, of a corporate defendant “corrupting itself,” Cruz, 720 F.3d at 120.

The Second Circuit noted that the principle in Discon and Cruz has its limits and “does not foreclose the possibility of a corporate entity being held liable … where it associates with others to form an enterprise that is sufficiently distinct from itself.” Riverwoods, 30 F.3d at 344; Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 263–64 (2d Cir. 1995). Thus, among other things, because BikerGear presented no evidence showing that any FedEx entity operated outside of a unified corporate structure guided by a single corporate consciousness. See Cruz, 720 F.3d at 121.

BikerGear’s argument that Discon and Cruz are distinguished because the alleged RICO enterprises in those cases were associations-in-fact comprised of all the defendant corporations combined, while the alleged enterprise here is a discrete subsidiary was viewed as “immaterial.”

Cedric Kushner

This Supreme Court case was distinguished as the Second Circuit stated that in Cedric Kushner the Supreme Court emphasized that its holding was limited to the circumstances in which “a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner—whether he conducts those affairs within the scope, or beyond the scope, of corporate authority.” Id. at 166, 121 S.Ct. 2087. As for both corporate employees and corporate entities, the Supreme Court suggested, Congress had in mind the “protect[ion of] the public from those who would run organizations in a manner detrimental to the public interest.” Id. at 165, 121 S.Ct. 2087 (quotation marks omitted).

The Second Circuit stated that the Court in Kushner described its earlier decisions relating to the distinctness issue (for example, Discon) as “significantly different”—a strong signal that it was not addressing cases in which, as here in BikerGear, a corporate person conducts the affairs of an enterprise consisting only of corporate members of its wholly-owned corporate family. Id. at 164, 121 S.Ct. 2087; see also Ray v. Spirit Airlines, Inc., 836 F.3d 1340, 1356 (11th Cir. 2016); ClassicStar Mare, 727 F.3d at 492.

Finally, the Second Circuit noted that in analogous contexts the majority of its sister circuits appear to agree that the fact of separate incorporation alone fails to satisfy RICO’s distinctness requirement. Id.,at *7 , citing cases.

Ed Note:   David J. Stander is an Attorney who focuses his practice on civil RICO. It is important to note that the holding only addressed RICO persons who are “corporate entities,” while the court distinguished the holding of Kushner in which the Supreme Court emphasized that its holding was limited to the circumstances in which “a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner—whether he conducts those affairs within the scope, or beyond the scope, of corporate authority.” Id. at 166, 121 S.Ct. 2087. Clearly, such a “corporate employee” who operates his P.C. through fraud is running the “an organization in a manner detrimental to the public interest.”



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