Eleventh Circuit Analyses RJR Nabisco to Hold That the Presumption Against Extraterritoriality was Rebutted for Certain Applications of the Federal RICO Statute

Comparelli v. Republica Bolivariana De Venzuela, ___ F.3d ___, 2018 WL 2749717 (11th Cir. 2018)

The court reversed and remanded a lower court decision which dismissed a complaint for lack of subject-matter jurisdiction. Foreigners had brought action against República Bolivariana de Venezuela and nationalized Venezuelan company under expropriation exception of Foreign Sovereign Immunities Act (FSIA), alleging unlawful taking of their property in violation of international law.

In ruling for the Plaintiffs/Foreigners, the court analyzed the extraterritorial application of the civil RICO statute, analyzing “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” Id., citing to RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S.Ct. 2090, 2101, 195 L.Ed.2d 476 (2016). In analyzing the FSIA “expropriation exception,” the court discussed that this case mirrors the situation described in RJR Nabisco, which held that the presumption against extraterritoriality was rebutted for certain applications of the federal RICO statute. There, the Supreme Court noted “that RICO defines racketeering activity to include a number of predicates that plainly apply to at least some foreign conduct.” RJR Nabisco, 136 S.Ct. at 2101. For example, the prohibition against hostage taking includes conduct that occurred outside the United States, provided that “the offender or the person seized or detained is a national of the United States,” “the offender is found in the United States,” or “the governmental organization sought to be compelled is the Government of the United States.” See 18 U.S.C. § 1203(b)(1); RJR Nabisco, 136 S.Ct. at 2101–02.

The court continued to state that in other words, like the FSIA expropriation exception, the RICO statute as applied to exterritorial hostage takings ensured a specific nexus to the United States. That nexus requirement was enough to rebut the presumption against extraterritoriality in RJR Nabisco, and we hold that the nexus requirement of § 1605(a)(3) similarly rebuts that presumption here.

The court concluded that on remand, the district court should permit the Comparellis to file an amended complaint and, after Venezuela and Pequiven have responded, address whether the domestic takings rule applies and whether jurisdiction exists under the FSIA’s expropriation exception.



Circuit Court Rules that the District Court Properly Abstained Until Appellate Review of Earlier Actions Were Determined Before Ruling that Res Judicata Barred a Civil RICO Action

Beck v. Clausen, __ F.3d __, 2018 WL 1572689 (7th Cir. 2018)

Plaintiffs (an LLC and its shareholders) (collectively “the Baeks”), brought this action against Northside Community Bank (“NCB”) and several of its employees, alleging civil RICO violations which focus on the allegedly fraudulent and abusive acts committed by NCB in the course of a lending relationship with the plaintiffs. This RICO action is the last in a series of legal actions between the parties.

In response to the RICO complaint, NCB initially moved to dismiss, or in the alternative, to stay the proceeding under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). After the state court struck or dismissed all of the plaintiffs’ claims and granted summary judgment to NCB on its claims, NCB amended its motion to assert an alternative ground for dismissal: res judicata. The Plaintiffs argued that res judicata could not apply to their RICO claim because they never had filed a similar RICO claim in state court. Although they had attempted to amend their complaint to include such a claim, that motion had been denied. According to the Baeks, “a claim that was never filed could not be dismissed.”

The district court granted NCB’s amended motion. Applying Illinois’ law of res judicata, it determined that there had been a final judgment both in the previous actions, there was identity of the parties (or their privies) in the prior actions and the federal RICO action; and those causes of action were the same as the federal RICO claim because they all involved “a single group of operative facts.”

Plaintiff had also argued that that the Circuit Court’s adjudication was not final until an appeal had been resolved on earlier actions. Although this argument did not “rely on new law or new facts,” the district court noted that it did “raise an important argument not yet passed upon.” The district court therefore considered the argument on the merits, and waited until the state appellate court issued an order affirming the judgments rendered in the state court with respect to two other actions before ruling the current RICO suit was barred.

This Circuit Court ruled that the district court correctly determined that res judicata precluded the plaintiffs’ present action, and therefore the district court granted the defendants’ motion to dismiss the complaint with prejudice. The Court also found that the abstention by the district court under the Colorado River doctrine, which allows courts to conserve judicial resources by abstaining from accepting jurisdiction when there is a parallel proceeding elsewhere, was proper finding that it was sensible to stay proceedings until an earlier-filed state case has reached a conclusion, and then (but only then) to dismiss the suit outright on grounds of claim preclusion.

Ed Note: The rules governing Colorado River abstention and res judicata are complex, but commonly broadly interpreted to bar civil federal actions in federal court.

Seventh Circuit Follows Second Circuit in Ruling that Injury to Intangible Property Rights for Purposes of a Civil RICO Action Occurs at Principal Place of Business of Plaintiff

Armada (Singapore) PTE Limited v. Amcol International, 885 F.3d 1090 (7th Cir. 2018)

The Seventh Circuit affirmed the lower court’s ruling dismissing a civil RICO plaintiff, granting judgment on the pleadings, after the Supreme Court ruling in RJR Nabisco, Inc. v. European Community, ___U.S.___, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016). Addressing RICO’s extraterritorial effect, the Supreme Court held that “[a] private RICO plaintiff … must allege and prove a domestic injury to its business or property.” Id. at 2106.
Here, Armada, a foreign corporation, alleges Amcol used its influence as largest shareholder of Ashapura, a foreign corporation, to engage in a number of schemes aimed at draining Ashapura of assets to thwart Armada’s collection efforts. The plaintiff brought a civil RICO action against Amcol, Ashapura and five John Does. Armada claimed that it suffered an injury to its property, namely its judgment and other claims against Ashapura. Armanda claims that Amcol, by means of racketeering activity, injured that property by divesting Ashapura of assets, thereby making the judgment and other claims against Ashapura uncollectable.
In discussing what the Supreme Court meant by “domestic injury,” the Court referred to the location where an injury was suffered. It also made a point of noting the domestic-injury requirement does not categorically bar foreigners from recovering under the statute’s provisions. The district courts have issued a wide range of opinions, but the Second Circuit became the first court of appeals to address the “domestic injury” issue.

In Bascuñán v. Elsaca, 874 F.3d 806 (2d Cir. 2017), the plaintiff, a resident of Chile, alleged that his cousin had stolen millions of dollars from him through various schemes. The Second Circuit rejected a one-dimensional approach, noting that RICO’s requirement that injury must be to business or property means all RICO claims are by nature based on “economic” injury. Id. at 1094. The Second Circuit adopted an approach that addressed each individual injury alleged, considered the four injuries pleaded by the plaintiff, and concluded that such minimal, defendant-initiated contacts with the United States were not sufficient to make the resulting injuries to the plaintiff “domestic.” On the other hand, the court held that the alleged theft of the bearer shares and the theft of the money in a New York bank account were “domestic injuries” as there was harm to tangible property that was located in the United States.

The court in Bascunan held that “where the injury is to tangible property, we conclude that, absent some extraordinary circumstance, the injury is domestic if the plaintiff’s property was located in the United States when it was stolen or harmed, even if the plaintiff himself resides abroad.”

The court here in Armada rejected Armada’s argument that its judgment and claims are tangible properties located in the United States. Amcol argued that there is no tangible property in this case, only “a bundle of litigation rights,” and that the connections to the United States are too tenuous to make Armada’s alleged injuries domestic.

The court followed Bascunan in discussing that injuries to a plaintiff’s intangible property is “suffered” at its residence, which for a corporation like Armada is its principal place of business. Here, Armada’s principal place of business is in Singapore, so any harm to Armada’s intangible bundle of litigation rights was suffered in Singapore. Thus, the injury is not domestic, and Armada failed to plead a plausible claim under civil RICO.

Ed. Note:    Intangible property rights can constitute sufficient injury to “business or property” if the plaintiff suffers concrete monetary loss. It is interesting that tangible property is treated differently from intangible property for purposes of “domestic injury.”


“Civil RICO Litigation 2018, A Plaintiff’s Guide Through the Maze”

Published in March 2018 ABA Journal of Business Torts and Civil RICO.  See Publication for complete article, including footnotes

The Supreme Court has emphasized the broad application and extraordinary purposes the Racketeer Influenced and Corrupt Organizations Act (“RICO”) has meant to serve. But, despite this broad mandate, many district courts view civil RICO as an “unusually potent weapon,” and thus the courts are particularly reluctant to allow civil RICO actions to proceed past the Rule 12(b)(6) pleading stage. In some ways this is understandable given that the predicate crimes for civil RICO are the same predicates for Department of Justice (“DOJ”) criminal RICO prosecutions, thereby raising the bar for civil RICO cases, despite the fact the standard of proof is considerably less (preponderance of the evidence).
Thus, district courts, as discussed herein, are pre-disposed to dismiss civil RICO cases under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). Despite this adversarial attitude, a plaintiff can win, but only upon a careful consideration and pleading of all of the elements of the offense, and by pleading sufficient plausibility.
However, sometimes even pleading all of the elements and pleading plausibility does not guarantee a court will deny the defendant’s motion to dismiss. This article will describe some of the most difficult issues and particular roadblocks in litigating a civil RICO case, which will hopefully provide a guide through the maze of civil RICO litigation.

A. Jurisdiction and Venue (RICO Injury)

A common ground for dismissing civil RICO cases is the lack of subject matter jurisdiction, i.e., the potential plaintiff must adequately plead he has been “injured in his property or business by reason of a violation of section 1962,” as described in 18 U.S.C. § 1964(c). The Supreme Court has been clear that the plaintiff’s injury must be “proximately and directly caused” by the RICO violation, which has been interpreted to be injury from the predicate acts themselves.
Next, courts have been clear that the injury must involve a “concrete monetary loss,” and thus expectancy losses or non-economic losses are not actionable. Also, when the RICO predicate crimes did not occur within the United States, the plaintiff must adequately allege he incurred ‘injury” within the jurisdiction of the United States to be able to bring an action. Lastly, courts are strict in not conferring jurisdiction to a plaintiff who relies “on conduct that would have been actionable as fraud in the purchase or sale of securities.”

B. Statute of Limitations
Another common impediment to civil RICO cases is the statute of limitations. The Supreme Court has found that civil RICO actions are subject to a four-year statute of limitations, which accrues to the plaintiff when he discovered or “should have discovered” the injury. If at any date after the injury has been discovered, and if a “new and independent injury” is incurred from the same violation, the right to sue accrues at the time the plaintiff discovered or should have discovered the latter injury. Importantly, “fraudulent concealment” by the defendant “equitably tolls” the running of the statute of limitations, only if the plaintiff is “reasonably diligent” in trying to discover their civil RICO claims.
C. Res Judicata and Collateral Estoppel
Prior state court actions resolved in favor of defendants may preclude a subsequent federal civil RICO action under “claim preclusion” (res judicata), or “issue preclusion” (collateral estoppel). This is a common defense.
D. Elements of a Section 1962(c) Violation
Although civil and criminal RICO provide for three substantive provisions, i.e., 18 U.S.C. § 1962(a), (b), and (c), there are separate injury requirements for alleging subsection (a) and (b) violations. As a result, most civil RICO cases are brought under section 1962(c). There are many complex issues which may trip up the civil practitioner, which are highlighted below.

1. Person (“Distinctness” From Enterprise)
A common ground of dismissal (when naming legal entities as Defendants) is when the plaintiff fails to allege distinctness between the RICO person and the enterprise which is that same legal entity corporation. Courts have ruled that a RICO enterprise may not consist “merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.”

In Cruz v. FX DirectDealer, LLC., the court addressed “distinctness” when the enterprise consists of multiple corporate entities which are also defendants. There, the court discussed that corporations that are legally separate but “operate within a unified corporate structure” and “guided by a single corporate consciousness” cannot be both the “enterprise” and the “person” under § 1962(c).

This issue is complicated further when corporate defendants which comprise the enterprise are “functionally separate,” as when they perform different roles within the enterprise or use their separate legal incorporation to facilitate racketeering activity.

2. The Association-In-Fact “Enterprise”

When “enterprises” are legal entities, there are few questions as to its existence. But, when alleged as “association in fact” enterprises, issues exist. In United States v. Boyle, the Court ruled that an enterprise must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose. The Court cited to its previous ruling on association in fact enterprise, i.e., United States v. Turkette, which stated that an association-in-fact enterprise is “a group of persons associated together for a common purpose of engaging in a course of conduct.”

Despite this liberal view of association in fact enterprise, defendants commonly argue that the alleged enterprise is not “separate and apart” from the pattern of racketeering. These arguments are usually addressed by Boyle itself wherein the Court, citing to Turkette, stated that although the existence of an enterprise is a separate element that must be proved, the evidence used to prove the pattern of racketeering activity and the evidence establishing an enterprise “may in particular cases coalesce.” Thus, the proper allegation of the Boyle factors, i.e., common purpose, relationships, and longevity, factors which are not necessarily needed to show predicate acts of wire fraud or money laundering, should enable a court to find that the enterprise is “separate and apart” from the pattern of racketeering.

3. Failure to Meet the Particularity Provision of Federal Rule 9(b)
A common plaintiff shortcoming (because the typical civil RICO alleges fraud) is failure to plead the circumstances of the fraud with particularity under Federal Civil Rule 9(b). Circuit courts have followed the literal language of Rule 9(b) and stated that a plaintiff may plead generally the defendants’ state of mind or intent to deceive or defraud, but must make “particularized allegations [regarding] the factual circumstances of the fraud itself” when pleading mail or wire fraud as a predicate act.
Circuit courts generally require plaintiffs to identify specific examples of the fraud while pleading the overall nature of the fraud generally. Circuits have found sufficient allegations of fraud when specific instances of fraud are adequately alleged.
One significant hurdle, as noted above, when pleading the predicate mail/wire fraud acts, a plaintiff must allege acts which themselves caused injury to the plaintiff. The Court in Schmuck v. United States, a criminal case interpreting section 1341, held that mailings/wirings need not contain misrepresentations, but only need be incident to an essential part of the scheme to defraud. But this does not necessarily mean, in the civil RICO context, that predicate acts properly alleging mail or wire fraud are also the proximate and “but-for” cause of the injury. This analysis has to be made on a case-by-case basis.
4. Pattern of Racketeering/Continuity Failure to Plead a Pattern
Courts also dismiss civil RICO cases based on fraud predicates finding that a “pattern of racketeering activity” has not been adequately alleged. In H.J. Inc. v. Northwestern Bell Telephone Co., the court held that the complaint must allege “relatedness” and “continuity” necessary to properly plead a ‘pattern of racketeering.’” Relatedness is often not an issue, but “continuity” remains the bully which the civil RICO plaintiff must tame.
In H.J. Inc., the Court stated that “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. Emphasizing that Congress was concerned in RICO with long-term criminal conduct, the Court did discuss other examples when the plaintiff himself may not have been the victim of long-term conduct, but the long-term violative conduct of the defendants is emphasized. For example, H.J. Inc. describes that “threat of continuity” can be shown when “predicates are a regular way of conducting defendant’s ongoing legitimate business (in the sense that it is not a business that exists for criminal purposes), or of conducting or participating in an ongoing and legitimate RICO “enterprise.”
Thus, civil RICO plaintiffs, when faced with alleging short-term defendant conduct, can try to assert the Defendants’ long-term pattern of victimizing others as a means to create an inference that long-term conduct would have continued, absent the filing of the lawsuit, against the plaintiff. Justice Alito, when on the Third Circuit, specifically cited to H.J. Inc. for this principle of “inference.” But, generally, the practitioner must be aware of his particular circuit law, which may range from a liberal treatment of “continuity,” to views which are so strict that they fall outside the bounds of any reasonable interpretation of H.J. Inc., nor RICO’s legislative history.
5. Civil RICO Conspiracy Provision
Civil RICO plaintiff face difficulties in pleading RICO conspiracy violations, i.e., 18 U.S.C. § 1962(d) violations as many courts refuse to embrace the Supreme Court’s view of RICO conspiracy which was expressed in a criminal RICO case. In Salinas, the Court held that that to secure a conviction for RICO conspiracy, the government is not required to allege or prove the actual completion of a single racketeering act by the defendant or any other member of the conspiracy because completion of an overt act is not an element of the offense. Moreover, the Supreme Court in Salinas specifically held that there is no requirement that the defendant “himself committed or agreed to commit the two predicate acts requisite for a substantive offense under section 1962(c).”
Despite the clear pronouncements in Salinas, whose principles, like those in other Supreme Court cases interpreting criminal RICO convictions, see Boyle v. United States, supra, must also apply in civil RICO cases, courts routinely dismiss RICO conspiracy claims if they find that a substantive violation of RICO was not adequately pleaded.
Although in civil RICO, unlike criminal RICO, a plaintiff must have sustained injury by “an overt act” that is “an act of racketeering or otherwise wrongful under RICO.” This requirement of an overt act causing injury however, should not completely obviate Salinas.
Thus, civil plaintiffs are typically faced with a court ruling that “the failure to state a claim for a substantive RICO violation,” is fatal to plaintiffs’ RICO conspiracy claim under § 1962(d).” The best course for the civil RICO plaintiff is to (1) always allege a substantive RICO claim; and (2) properly allege the conspirator defendants agreed that at least one substantive civil RICO defendant violated section 1962(c).
There is a place for civil RICO litigation and cases can be successfully litigated. This roadmap of some of the most contentious civil RICO issues should assist practitioners to be the “private attorney’s generals” as envisioned by Congress and the Supreme Court.

Third Circuit Affirms Treble Damages Award to Plaintiffs in Civil RICO Involving Bank Fraud Scheme

Liberty Bell Bank v. Rogers, 2018 WL 834197 (3rd Cir. Feb. 13, 2018)

The Third Circuit affirmed the granting of Appellee Liberty Bell Bank’s motion for summary judgment and the awarding of more than ten million dollars in damages.

In 2013, Liberty Bell Bank (LBB) filed a complaint against Rogers and various entities he owned and controlled (LGR), alleging violations of the federal RICO and the New Jersey RICO act. The complaint alleged that defendants developed a scheme through which they fraudulently obtained loans from LBB, and further defrauded it by making payments on the loans using a check kiting scheme.

The District Court had granted partial summary judgment to LBB on its federal RICO and breach of contract claims, holding that LGR and Rogers were liable for damages in connection with the check kiting scheme, and that these damages were subject to trebling under the federal RICO statute ($10,632,186.57 in damages for the RICO claim, plus attorneys’ fees and costs).

Rogers neglected to file a responsive statement of material facts, and thus the District Court was entitled to deem the statement of facts as admitted, i.e., Rogers unlawfully entered into multiple leases that were assigned to LBB as collateral for loans which did not exist either because the end user cancelled the lease or the equipment was never purchased. Also, Rogers established checking accounts at LBB, Susquehanna, and Roma on behalf of the LGR Entities which enabled Rogers to access funds on deposited checks before the funds were paid by the bank on which they were drawn. On April 11, 2013, Roma Bank, suspicious that defendants were engaged in a check kiting scheme, put a block on the LGR accounts. Despite being notified of the block, Rogers did not alert LBB. The next day, LBB received checks back from Roma that were unpaid. LBB and Susquehanna subsequently put a hold on the LGR Entities’ accounts. It was then discovered that defendants had “utilize[d] funds and replace[d] funds with ultimately uncollectible checks in a circular fashion” among the three banks. In the end, after LBB applied a series of chargebacks, the LGR accounts were overdrawn by over $2 million. Defendants had also overdrawn their accounts at Susquehanna Bank by $2,890,000, and at Roma Bank by $2,100,000.

The Federal RICO Claim

The District Court determined that Rogers and LGR committed the predicate crime of bank fraud, 18 U.S.C. § 1344, which makes it an offense to execute, or attempt to execute, a scheme or artifice (1) to defraud a financial institution or (2) to obtain money from it by false or fraudulent means. The District Court found that, to avoid defaulting on LGR’s bank loans, Rogers executed a check kiting scheme, defrauding LBB, Roma Bank, and Susquehanna Bank out of millions of dollars. A check kiting scheme violates the bank fraud statute.*3. The LGR Entities made more than $120 million of deposits and withdrawals across these bank accounts during the month of March 2013 alone, despite having an approximate average annual revenue of $7 million to $10 million.

Thus, the summary judgment record supports the conclusion that Rogers acted with knowledge and specific intent to use the check kiting scheme to defraud LBB. Therefore, that there is no genuine factual dispute that Rogers’ actions amounted to racketeering activity as Rogers had deposited multiple checks as part of the scheme and thus committed separate violations of the bank fraud statute. The Court thus held that each check deposit in a kiting scheme constituted a separate execution of the scheme to defraud the bank.

The Court also found continuity “is a temporal concept” but the district court made no definitive ruling on this temporal element of the claim, but the record showed the Defendant engaged in an overall scheme that extended from at least 2010 to 2013, a period of time sufficient to satisfy the continuity requirement of RICO. See Tabas v. Tabas, 47 F.3d 1280, 1294 (3d Cir. 1995) (holding scheme lasting over three years is “substantial period of time” for purposes of establishing pattern).

Finally, the Court found LBB sustained financial losses totaling $3,544,062.19 as a direct result of Rogers’ racketeering activity, and thus damages were properly awarded on that claim in the amount of $10,632,186.57 (trebled).

      Ed Note:   This case shows that when the Defendant engages in clear criminal activity, i.e., bank fraud though check-kiting, for a substantial period of time, with multiple victims, the Plaintiff will be able to show a successful civil RICO, and receive treble damages plus attorneys’ fees and costs.


Fraudsters Get a Break- Ninth Circuit Affirms Dismissal of Civil RICO Finding Inadequate “Continuity”

Kan-Di-Ki v. Sorenson, 2018 WL 832865 (9th Cir., Feb. 13, 2018)

The Ninth Circuit affirmed the lower court’s dismissal of federal civil RICO claims.

The Plaintiff (DL) alleged that Defendants John Sorensen and Timothy Paulsen perpetrated a fraud scheme that lasted ten months, from January 2012 to October 2012, when they allegedly defrauded three x-ray and laboratory vendors. The Court stated it has declined to adopt a bright-line rule for how long an alleged scheme must last to establish closed-ended continuity. However, under the circumstances present here, which involved a limited number of participants and a limited number of alleged actual victims, the Court found the alleged scheme was too limited and short in duration to sufficiently establish closed-ended continuity.

Open-Ended Continuity

The Court stated that the district court properly concluded that the amended complaint does not adequately plead open-ended continuity, rejecting the claim that Sorensen and Paulsen’s conduct during 2012 was part of a regular way of doing business, and thus that their conduct stretches into the future with a threat of repetition. The court noted that the three vendors targeted provided the same types of services (x-ray and laboratory services), and all three were targeted in the same time period. The fact that DL does not identify any other vendors targeted during 2012 suggests that this was a one-time scheme that was aimed at cutting costs in those service categories (whether fraudulently or legitimately).

The Court rejected arguments that a spreadsheet prepared with the words “Total so far” permitted the inference that Sorensen and Paulsen were going to begin targeting new categories of vendors. They may merely have intended to seek further credits from the x-ray and laboratory vendors listed on the spreadsheet, whom they had already targeted. Thus, the allegations in the amended complaint are not sufficient to establish open-ended continuity.*1.

The Court also concluded that the amended complaint does not adequately plead post-2012 conduct that would bolster its arguments for closed-ended and open-ended continuity even though there were three internal emails sent in 2013, which the Court stated may simply reflect that Sorensen and Paulsen were lawfully working to negotiate with vendors. DL does not plausibly allege that these emails are more likely to reflect an intent to defraud than an intent to reduce costs through legal means. Nor has DL plausibly alleged that these emails were “incident” to a post-2012 fraud scheme, because there are no well-pled allegations that there was any scheme to defraud vendors after 2012. The amended complaint contains no specific facts about any fraudulent conduct toward any identifiable third parties after 2012. Thus, the post-2012 fraud allegations do not bolster DL’s arguments for closed-ended or open-ended continuity

Even if they were adequately pled, actions that merely shield defendants from liability for a past fraudulent scheme do not extend that scheme unless other circumstances suggest that the scheme is not yet complete. Thus, the post-2012 non-fraud allegations did not bolster DL’s arguments for closed-ended or open-ended continuity.*2.

Ed. Note:  This case shows that courts require specific facts about fraudulent conduct against other victims to show the “regular way of doing business” prong for threat of continuity (open-ended). The last part of the holding suggests that any actions after completion of the scheme to defraud do not extend its time or threat. This leaves open the question of whether “lulling letters” further the threat.

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.