District Court Judge Denies Defendants’ Motion to Dismiss Civil RICO Claim Finding the Complaint Sufficient Despite the Fourth Circuit’s Strict Interpretation of Civil RICO Fraud Allegations

Timothy Ekstrom  et al. v. Congressional Bank- Successor-In-Interest to American Bank, 2020 WL 6565251 (D.Md., Nov. 9, 2020)

Facts:

Plaintiffs allege that American made referrals of their loans and the loans of others to All Star for title and settlement services. In exchange, All Star, which is not a defendant, allegedly laundered payments to American, largely through third party marketing companies. As a result of the scheme, plaintiffs allegedly paid inflated settlement fees.  Plaintiffs contend that American “laundered the kickbacks through third party marketing companies” to conceal the scheme, and “continuously and regularly used the U.S. Mail and wires,” in furtherance of the scheme, “over a period of at [least] three years….” 

From April 2009 until at least September 2010, All Star paid at least 38 kickbacks to American “for the assignment and referral of American Bank loans from” the Nottingham Branch.  Throughout this period, the Nottingham Branch “assign[ed] and refer[ed] more than 800 American Bank loans [to All Star], secured by property in 34 states, pursuant to the Kickback Agreement, agreement fixing prices, and the pattern of racketeering activity in furtherance of the All Star scheme.” 

Plaintiffs assert that “American Bank and All Star under[took] affirmative acts that fraudulently conceal[ed]” the kickback scheme.

Civil RICO Precepts

The court discussed that in the Fourth Circuit, a civil RICO action “‘is a unique cause of action that is concerned with eradicating organized, long-term, habitual criminal activity.’ ” The Fourth Circuit “will not lightly permit ordinary business contract or fraud disputes to be transformed into federal RICO claims.” 

Congress has directed that the statute “be liberally construed to effectuate its remedial purposes.”  But, “Congress contemplated that only a party engaging in widespread fraud would be subject to” the “serious consequences” available under the RICO statute, such as treble damages. Menasco, Inc. v. Wasserman, 886 F.2d 681, 683 (4th Cir. 1989). And, courts have recognized the “need to limit [RICO’s] severe penalties to offenders engaged in ongoing criminal activity, rather than isolated wrongdoers.” Friedler2005 WL 465089, at *7.

Enterprise

The court found at this stage of the case the plaintiffs have adequately alleged an association-in-fact enterprise. First, plaintiffs plainly allege that a bilateral enterprise existed and its members had a “common purpose”: to “defraud[ ] borrowers into paying higher and fixed prices for title and settlement services.  Second, plaintiffs have adequately alleged that the individual members of the enterprise had relationships with each other and carried out specific roles in furtherance of the enterprise.  For example, plaintiffs attached numerous exhibits showing a relationship between Horwitz and various account executives at American.  Finally, the members of the enterprise were associated with each other for an extended period of time—at least 18 months, if not longer. *20.

Racketeering Activity –  Rule 9(b)

Further, “[w]hile a plaintiff normally must plead specific instances of mail or wire fraud, such a requirement is relaxed where there are ‘numerous mailings of standardized documents containing identical false representations.’ ” In these cases, “Rule 9(b) may be satisfied if the complaint sufficiently identifies ‘[t]he time period involved and the content of the misrepresentations.’ ” 

The Complaint alleges that there are “numerous mailings of identical false representations,” the time frame during which they were sent, and the content contained in the solicitations.  Further, plaintiffs have appended to the Complaint copies of the allegedly fraudulent solicitation mailers.  And, with respect to the wires, the Complaint alleges specific dates when American used wires to further its scheme and provided copies of invoices purportedly showing the funneling of kickback payments through third-party companies. Accordingly, the Judge concluded that plaintiffs have alleged, with particularity, that American engaged in a scheme to defraud borrowers and used the mail and wire services to further that scheme. 

Pattern of Racketeering Activity

The court found that plaintiffs have alleged a fraudulent scheme that, if proven, would “pose a special threat to social well-being.”  That is, the allegations are similarly serious: plaintiffs allege a fraudulent scheme involving at least two companies and five bank branches over at least 18 months that allegedly affected over 800 borrowers’ loans in 30 states.  At this stage, the allegations are sufficient to support a claim of a pattern of racketeering activity that “rises above the routine,” and closed-ended continuity was satisfied.

Proximate Cause

The Court explained that “a person can be injured ‘by reason of’ a pattern of mail fraud even if he has not relied on any misrepresentations.” Id. at 649-50;  (“Bridge’s holding eliminates the requirement that a plaintiff prove reliance in order to prove a violation of RICO predicated on mail fraud.”). Moreover, “a RICO claim predicated on mail fraud is based on the fraudulent scheme rather than on a particular fraudulent mailing.” 

Accordingly, drawing all inferences in favor of plaintiffs, the Court concluded the proximate cause element at this stage.

Ed. Note:  In finding closed-ended continuity, the Complaint alleged that the predicate acts—the wire transfers and over 100,000 mail solicitations—spanned a period of at least eighteen months.  Thus, in the Fourth Circuit it is not the amount of time, but rather the extensiveness of the conduct and scheme which is relevant in closed-ended continuity.   Also, the exhibits filed with the Complaint were key to the court’s determination.

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