Magistrate Judge Rules Plaintiffs Can File Second Amended Complaint in Civil RICO Action

Church Mutual Ins. Co., Inc. v. Philip Marshall Coutu, et al., 2018 WL 822552 (D. Colo., Feb. 12, 2018)

The Judge granted the Plaintiffs’ motion to file a Second Amended civil RICO Complaint. The events giving rise to Plaintiff’s Complaint involved an appraisal award issued to one of Church Mutual’s policyholders for repairs completed to the policyholder’s roof following a hailstorm. [Id.]. Plaintiff alleged that Defendants conspired to unlawfully inflate the cost of repairs needed for their own economic gains, as each had a stake in a higher appraisal award.
Although Plaintiff had adequately alleged one instance of mail/wire fraud in its earlier pleadings, in this filing Church Mutual identifies six (6) predicate acts of mail or wire fraud (i.e., Defendants employing a similar fraudulent scheme to receive corrupt appraisal awards and damages from subsequent bad-faith lawsuits against other insurers.

The Judge ruled that there was no undue delay or prejudice which could justify the denial of a motion to amend. The Judge addressed “futility” broadly stating ‘A proposed amendment is futile if the complaint, as amended, would be subject to dismissal.’ ” “If a party opposes a motion to amend […] on the grounds of futility, the court applies the same standard to its determination of the motion that governs a motion to dismiss under Fed. R. Civ. P. 12(b)(6).”
Futility- Pattern of Racketeering Activity
In addressing “futility,” the Judge found the SAC alleged a pattern of racketeering activity with particularity to meet Rule 9(b) even as the SAC merely expounded on the six (6)2 bad faith lawsuits identified in the FAC with the filing dates of said lawsuits and “other details about each case” that are public record, all involving other insurers. The Judge stated that rather than listing the additional bad-faith lawsuits as before, the SAC now provided factual allegations regarding the circumstances of such suits and Defendants’ underlying conduct. *6.
The Judge did not agree with Defendants’ arguments that the SAC contained only conclusory allegations of mail or wire fraud, that the SAC does not identify who sent the appraisal demands. The Judge ruled that “deceitful concealment of material facts may constitute actual fraud,” . . . “despite no duty to disclose that information” A perpetrator may be guilty of mail or wire fraud without personally effecting the mailing or wiring if she “does an act with knowledge that the use of mail [or wire] will follow in the ordinary course of business, or where such use can reasonably be foreseen,” though not actually intended.*7. The Judge also explained that “[t]he mailing requirement is interpreted broadly…and the use of the mails need not be an essential element of the scheme….Rather, the charged mailing need only be incident to an essential part of the scheme.” Accordingly, the Judge concluded that the SAC adequately pleaded a pattern of racketeering activity.

Futility- Enterprise

The Judge stated that allegations of two separate legal entities joining together, in addition to several other entities or persons, to conduct racketeering activity can be sufficient to establish an association-in-fact enterprise. The SAC also sufficiently alleged that the enterprise’s purpose was to defraud insurance companies, and details the involvement of each alleged enterprise member in that general scheme, including, but not limited to, searching for potential roofing projects through which Mr. Coutu or his companies and agents would be hired as public adjuster, nominating Mr. Bensusan as the insured’s “impartial appraiser, and then encouraging the insureds to initiate bad-faith lawsuits against the insurers based on the dispute between Mr. Bensusan’s appraisal and the insurers’ appraisals. The SAC also contained sufficient allegations as to the relationship among those associated with the enterprise, and that this conduct occurred over several years. Based on the foregoing, this court concluded that the SAC plausibly alleged an association-in-fact enterprise notwithstanding Defendants’ assertion that Plaintiff “has not alleged with any particularity the ‘organization’ by name or with any specificity regarding its existence.” *8.

Futility- Standing

The Judge stated that for Church Mutual to maintain a viable RICO claim its injuries must be proximately caused by the RICO violation. This may include economic injury or loss, property damage, or adverse business effects, among others. Defendants’ argued that Plaintiff’s allegations of paying an inflated appraisal award and unnecessary litigation fees is too speculative and indirect. Though true that a plaintiff cannot recover for injuries “flowing merely from the misfortunes visited upon a third person by the defendant’s acts,” Plaintiff alleged, because of the fraudulent scheme, it was required to pay an inflated appraisal award and had to incur fees and costs defending against a frivolous lawsuit. These out-of-pocket injuries are sufficient to allege an injury proximately caused by Defendants’ RICO violation. *9.
Other Victims– The Judge also agreed with Plaintiff that the SAC does not seek damages associated with the other bad-faith lawsuits Defendants were associated with but, rather, pleads such lawsuits to establish the necessary pattern of racketeering activity. Thus, this court concludes that the SAC adequately pleaded RICO standing.

Futility- Conspiracy

Although not raised by Defendants, Church Mutual must allege that Defendants “adopt[ed] the goal of furthering or facilitating the criminal endeavor” even if they did not commit or agree to commit two or more predicate acts. See United States v. Randall, 661 F.3d 1291, 1297 (10th Cir. 2011). Based on the SAC’s allegations recounted above, the SAC plausibly pleads RICO and COCCA conspiracy claims as it pleaded the necessary elements for violations of both RICO and COCCA. It also details an intricate relationship between all Defendants—one that Plaintiff alleges was designed to perpetrate a scheme whereby Defendants agreed to conceal material facts in an effort to defraud insurance companies. This court finds such allegations sufficient to state plausible RICO and COCCA conspiracy claims.

Ed Note: There are numerous takeaways here- (1) fraud can be based on concealment even without a preexisting duty; (2) pattern can be show, i.e., threat of continuity by conduct of Defendant to other victims, not only the plaintiff; (3) “several years” is sufficient for longevity in Boyle test; and (4) criminal RICO is used as a basis for determining civil RICO conspiracy, i.e., Randall case. This is a particularly useful case in the 10th Circuit.

David J. Stander is a RICO Attorney who focuses on civil RICO cases.


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