Third Circuit Again Addresses Closed-Ended Continuity in Civil RICO Action; Reaffirms Holding That Measure is the Length of Time of Defendants’ Fraudulent Activity

Yucaipa American Alliance Fund I L.P. v. English, __ Fed. Appx. ___, 2017 WL 5483163 (3rd Cir., Nov. 5, 2017)

The Third Circuit confirmed the District Court’s granting of Plaintiff BD/S’s motion to dismiss the RICO claims. The lower court had concluded that Yucaipa lacked RICO standing and had failed to allege a pattern of racketeering activity, and declined to exercise jurisdiction over the remaining state law tort claims.

RICO Injury

The Court first held that the District Court did not err in concluding it lacked RICO standing, stating that the District Court correctly determined Yucaipa’s alleged injuries were not a concrete financial loss and were contingent on the result of the pending bankruptcy litigation.  RICO requires proof of actual monetary loss, i.e., an out-of-pocket loss,” and an injury contingent upon the impact of events in the future which have not yet occurred” will not suffice.

The Court found that Yucaipa’s allegations, first, the loss of value of its first lien debt due to equitable subrogation in the bankruptcy proceeding, and second, attorneys’ fees and expenses from the bankruptcy and related litigation, did not suffice to confer standing for civil RICO liability under section 1964(c). The Court found that the first alleged injury is plainly contingent on the outcome of the pending bankruptcy proceeding, which is still ongoing, and the second alleged injury could not be decided because these attorneys’ fees incurred as a result of the alleged RICO violations are also contingent on the outcome of pending litigation in the bankruptcy court.

Pattern of Racketeering

The court also determined that the District Court correctly concluded that Yucaipa failed to allege a closed-ended continuity of RICO activity (having given up on alleging open-ended continuity). The Court discussed that “because ‘duration is the sine qua non of continuity’ in a closed-ended scheme, … twelve months [between RICO predicate acts] is not a substantial period of time.” *5, citing cases.

The District Court concluded Yucaipa had failed to plead a closed-ended continuity by looking at the dates of the alleged predicate acts in the complaint. The earliest predicate act identified in the complaint was an email sent on September 16, 2011, and the last predicate acts alleged were statements in the involuntary bankruptcy petition filed in May 2012, i.e., only nine months and thus did not satisfy the closed-ended continuity requirement.

Yucaipa contends the District Court erred in calculating the length of the pattern of racketeering arguing the closed-ended continuity should be deemed to begin with the 2009 emails from BD/S to Yucaipa because this is when the “underlying scheme” began.

Yucaipa relies on Tabas v. Tabas, in which the Circuit stated “in civil RICO complaints based on predicate acts of mail fraud ‘the continuity test requires us to look beyond the mailings and examine the underlying scheme or artifice.’ ” 47 F.3d 1280, 1294 (3d Cir. 1995) (quoting Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1414 (3d Cir. 1991)).

In Tabas, the Court considered claims arising out of an alleged RICO conspiracy by a partner in a real estate firm and his business associates to defraud the estate of a deceased partner through mischaracterizing personal expenses as business expenses and receiving compensation not authorized by the partnership agreement. Tabas, 47 F.3d at 1282–85. The alleged predicate acts were instances of mail fraud, but we explained “[e]ach time defendants misrepresented the business nature of an expense, made a questionable charge, or received compensation to which they were not entitled, they lessened the income available to the” plaintiffs. Id. at 1294. We concluded the RICO continuity included each of the fraudulent deductions from the assets of the partnership. Id.

Here,  Yucaipa asked the court to extend the Tabas holding beyond fraudulent conduct to include conduct which did not violate any RICO predicate statute, but that allegedly led to losses due to subsequent RICO predicate acts. The Court found that these discussions (which occurred in year 2009) are not comparable to the fraudulent actions of the defendants in Tabas, which caused direct harm to the plaintiffs, and the Court declined to extend Tabas to these facts. Accordingly, we agree with the District Court’s determination that Yucaipa failed to plead a closed-ended continuity based on RICO predicate acts occurring over a nine-month period.

Ed. Note:   This case addresses issues raised by this author, David J. Stander, Civil RICO Attorney, in a recent article published in the ABA Business and Torts discussing Justice Alito’s concurrence/dissent in Kehr Packages. The holding above is consistent with the holding in Kehr Packages, i.e., duration is the “relevant criminal conduct is the defendant’s deceptive or fraudulent activity, rather than innocent mailings that may continue for a long period of time.” Kehr Packages, at 1418.

Thus, the above holding is the measure in the Third Circuit, even though Justice Alito indicates that the duration “must equal the duration of the related predicates.” Id., at 1423. Duration measured by length of time of mailings/wirings is the view of the Second Circuit.  Reconciling these positions is difficult, but for now, the holding in the Third Circuit, buttressed in part by this instant decision, is the measure is the period of deceptive or fraudulent activity, even if the actual mailings/wirings cover a shorter period of time.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s