Court Denies Defendant’s Motion to Dismiss Finding Sufficient “Distinctness” Between Defendant and Enterprise

In Re ClassicStar Mare Lease Litigation et al. v. Plummer, et al, 2019 WL 289070 (E.D. Ky., 1/18/19)

Plaintiffs aver that Defendant Parrott, among others, played a role in devising, perpetrating, carrying out, marketing and/or covering up the fraudulent Mare Lease Program scheme to individual and business investors, including Plaintiffs. Defendant GeoStar sold many more Mare Lease Programs than the thoroughbred interests owned by ClassicStar could support. Defendants, including Parrott, intentionally oversold the Mare Lease Programs knowing that ClassicStar, ClassicStar Farms, LLC or ClassicStar Farms, Inc. did not own enough thoroughbred mare interests sufficient to support the number of Mare Lease Programs sold.
The District Court concluded that Plaintiffs’ Complaint alleged an enterprise distinct from the defendants, and also properly pleaded the RICO claims. Regarding the “enterprise” issue, the court conclude that Plaintiffs have pleaded an “enterprise” distinct from the “persons” cognizable under the statute, stating that “[a]n enterprise must be merely an ongoing organization, formal or informal.” Citing cases. Even where a person owns 100% of a corporation’s shares that ownership does not change the fact that the corporation and the owner are separate legal entities.* 3, citing cases.

The Court disagreed with defendant Parrott’s assertion that there can be no RICO claim in this case because the alleged enterprise consists merely of a corporate entity (i.e., Classicstar) associated with its own employees or agents carrying on the regular affairs of the corporation. Id., at 7.

The court explained that the “enterprise” alleged is not ClassicStar, but rather the “Mare Lease Marketing Enterprise,” which was comprised of the following “persons”: David Plummer, Spencer Plummer, Tony Ferguson, John Parrot, Thom Robinson, ClassicStar, LLC, ClassicStar Farms, LLC, ClassicStar Thoroughbreds of Kentucky, ClassicStar 2004, ClassicStar 2004 Powerfoal Stable, ClassicStar 2005 PowerFoal Stables, ClassicStar 2003 Racing Partnership, GeoStar Corp., FEEP, GeoStar Equine Energy, Inc., GeoStar Financial Services, NELC, New NEL, Terry Green and Strategic Opportunity Solutions, LLC. Thus, Parrott, the other moving defendants whose requests for relief are now moot, and individuals and entities entirely unrelated to ClassicStar, such as Terry Green, are the persons forming the Mare Lease Marketing Enterprise. While, under the “distinctness” requirement, a corporation may not be liable under section 1962(c) for participating in the affairs of an enterprise that consists only of its own subdivisions, agents, or members, and cannot join with its own members to undertake “regular corporate activity” and thereby become an enterprise distinct from itself, the situation is different when (1) the enterprise consists of individuals and entities other than a corporation’s own subdivisions, agents or members and (2) undertakes activities other than “regular corporate activity.”

The distinctiveness requirement is met because the Mare Lease Marketing Enterprise consisted of several entities and individuals, including those outside the chain of corporate ownership of ClassicStar, GeoStar and other ostensibly related entity defendants. Moreover, the activities of the Mare Lease Marketing Enterprise were not the “regular corporate activities” of ClassicStar, which were purportedly breeding, raising and boarding thoroughbred horses, and the like. Thus, the Complaint adequately pleaded the element of “enterprise.” *4.

That the conspirators include related corporations, such as GeoStar and ClassicStar, and their officers, directors, managers and/or employees, such as Ferguson, Robinson and Parrott, does not, without more, mean that there is no distinction between the “persons” and the “enterprise.” For example, taking the averments of the Complaint as true, GeoStar and ClassicStar are separate and distinct legal entities, and thus separate and distinct “persons” for RICO purposes. Similarly, Ferguson, Robinson and Parrott are both corporate owners/employees and natural persons, and they are distinct from the corporation itself, a legally separate entity with different rights on the facts before this Court. RICO requires no more “separateness” than that. Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001). An employee who conducts the affairs of a corporation through illegal acts comes within the terms of a statute that forbids any “person” unlawfully to conduct an “enterprise.” Id.

Ed Note: This case is a rather clear-cut example of distinctness. It is interesting because the enterprise does include an individual and entities who are also named as defendants (Parrott), thus supporting the principle that a defendant (individual) is different than an association of which he is merely a part. See Atlas Pile Driving; and entities are distinct when they conduct other than regular corporate activities.

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Court Reverses Dismissal Finding Adequate Proximate Causation Finding Complaint Can Be Saved by Amendment; Conflicting Case Law in Circuit Regarding Whether Damage to Business Reputation Provides Standing

Hamoni International Spice Inc. v. Hume, 2019 WL 286923, __ F.3d __ (9th Cir. 1/23/19)

The appeals court reversed and remanded the district court’s denial of a civil RICO claim finding the plaintiffs adequately alleged proximate cause with respect to one category of damages, and that they should have been granted leave to amend their complaint with respect to at least a second category.
Harmoni (plaintiff) is the only importer of Chinese garlic with a “zero-duty rate,” meaning it does not have to pay the hefty anti-dumping duties imposed on other importers of Chinese garlic. Harmoni alleges that some of these importers, jealous of the competitive advantage Harmoni enjoys, conspired to eliminate or reduce that advantage through two separate unlawful schemes.
The first scheme involved efforts by Harmoni’s Chinese competitors to funnel imported garlic into the United States by submitting fraudulent shipping documents to U.S. customs officials in order to evade applicable anti-dumping duties. The defendants then sold that garlic in the United States at less than fair value, resulting in increased sales for them and a corresponding decrease in Harmoni’s sales.

The second scheme involves the filing of sham requests to force Harmoni to incur significant expenses defending itself during the course of the administrative review process. In addition, Harmoni alleges that its competitors used the administrative review process as a public forum for falsely accusing Harmoni of illegal and unethical business practices, such as using prison labor to produce its garlic. Harmoni asserts that, as a direct result of these false accusations, it suffered lost sales and harm to its business reputation.

On appeal, Harmoni challenge only the dismissal of its RICO claim as to four of the defendants: Robert Hume, Joey Montoya, Stanley Crawford, and Huamei Consulting Co., Inc. on the ground that Harmoni had not adequately alleged proximate cause.

To prevail on a civil RICO claim, a plaintiff must prove that the defendant’s unlawful conduct was not only a “but for” cause of his injury but also the “proximate cause” of the injury, which requires “some direct relation between the injury asserted and the injurious conduct alleged.”

Regarding scheme one, there is no proximate cause because the relationship between the defendants’ unlawful conduct and Harmoni’s alleged injury is too attenuated to support a finding of proximate cause.

Regarding the second scheme Harmoni has alleged, Harmoni sought to recover damages that fall into three categories: (1) expenses incurred in responding to the Department of Commerce’s administrative review; (2) lost sales; and (3) harm to its business reputation. The Court held:

Regarding (1) Harmoni has adequately alleged proximate cause with respect to the first category of damages. As to the expenses it incurred during the administrative review process, there is a “direct relation between the injury asserted and the injurious conduct alleged.” Refusing to respond to the Department of Commerce’s inquiries would have resulted in the loss of Harmoni’s zero-duty rate, thereby subjecting its imported garlic to the same prohibitively high anti-dumping duties that Harmoni’s rivals must pay. These allegations establish a direct causal link between the defendants’ allegedly wrongful conduct (filing sham requests for an administrative review) and the injury Harmoni asserts (being forced to incur expenses responding to the review triggered by the sham filings). The Court also analyzed three factors to assess when considering whether proximate cause has been shown weigh in Harmoni’s favor. See *3.

Regarding (2), lost sales attributable to the defendants’ false accusations about Harmoni’s business practices—Harmoni may be able to allege proximate cause as well, relying on Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 128 S.Ct. 2131, 170 L.Ed.2d 1012 (2008), explaining why a plaintiff can be injured “by reason of” acts of mail fraud. If Harmoni can prove that it lost sales as a direct result of the defendants’ predicate acts of mail and wire fraud, the proximate cause element of its RICO claim will be satisfied.

Standing: Regarding (3) -harm to Harmoni’s business reputation—that issue would need to be litigated on remand. The parties dispute whether damage to business reputation constitutes a compensable injury under RICO. Harmoni argues that harm to business reputation constitutes an injury to a “specific business or property interest” under California law and is therefore covered by RICO. See Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc) (per curiam). The defendants argue that RICO precludes recovery for harm to intangible property interests and that the reputation of a business constitutes such an interest. See Oscar v. University Students Co-operative Association, 965 F.2d 783, 785–86 (9th Cir. 1992) (en banc). Because the district court has not yet addressed this issue and the parties have not adequately briefed it on appeal, we decline to resolve it here. The issue remains open for the district court to take up on remand.

Because the complaint could potentially be saved by amendment, the district court should have granted Harmoni leave to amend.

Court Rules a Foreign Corporation’s Inability to Collect on a Judgement Was Not “Domestic Injury” and Thus No Claim Existed Under Civil RICO

Cevdet Aksut Ve Ogullari Koll.Sti (“Cevdet”) v. Cavusoglu, 2018 WL 6016549 (3rd Cir., November 16, 2018)

The Third Circuit affirmed the dismissal of plaintiff’s “RICO” claims. The plaintiffs asserted defendant Cavusoglu failed to pay Cevdet for goods. The District Court dismissed Cevdet’s RICO claims holding that Cevdet failed to plead a predicate pattern of racketeering activity and continuity to state a RICO claim and that Cevdet failed to plead a domestic injury as required by RICO.

The Court reviewed Cevdet’s assertion that the District Court erred in concluding that it did not suffer a domestic injury as required under RICO, 18 U.S.C. § 1964(c), and dismissing its RICO claim. RICO creates a private right of action for injuries to a person’s business or property. 18 U.S.C. § 1964(c). While “RICO applies to some foreign racketeering activity,” “[s]ection 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.” RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2103, 2111 (2016).

The Court stated that RICO allows recovery for domestic injuries to both tangible and intangible property, and the Court must identify where the property is harmed. The harm to tangible property is deemed to occur where the property is located. So, a plaintiff suffers a domestic injury to tangible property “if the plaintiff’s property was located in the United States when it was stolen or harmed, even if the plaintiff himself resides abroad.” *3, citing Bascunan v. Elsaca, 874 F.3d 806, 820-21 (2d Cir. 2017).

However, where “harm to intangible business interests is alleged[,] [t]he location of such injuries simply cannot be identified with the same geographic certainty that is endemic in the very concept of tangible property.” Humphrey v. GlaxoSmithKline PLC, 905 F.3d 694, 703-04 (3d Cir. 2018). To determine the location of an injury to intangible property, the court “must focus primarily upon where the effects of the predicate acts were experienced.” Id. at 707. To this end, the Court stated that it must weigh a number of factors, including:

where the injury itself arose; the location of the plaintiff’s residence or principal place of business; where any alleged services were provided; where the plaintiff received or expected to receive the benefits associated with providing such services; where any relevant business agreements were entered into and the laws binding such agreements; and the location of the activities giving rise to the underlying dispute.

Id.

No one factor is “presumptively dispositive.” Id.

The Court discussed that Cevdet describes its injury as the damage to its $1.1 million judgment against Cavusoglu caused by Defendants’ transfer of funds that shielded Cavugolu’s assets from collection by creditors like Cevdet. This judgment does not have a physical existence and is an ‘intangible asset[.]’ ” Applying the Humphrey factors, the Court concluded that Cevdet’s injury is not domestic for the purposes of § 1964(c). Although Cevdet has a judgment against Cavusoglu under United States law, Cevdet is a Turkish company with its principal place of business in Turkey, and Cevdet experiences the loss from its inability to collect on its judgment in Turkey. Because its injury is not felt in the United States, Cevdet has not suffered a domestic injury and is therefore foreclosed from stating a RICO claim, and the District Court properly dismissed it. *3.

Why Don’t District Courts Comply with the Supreme Court’s Liberal Construction of Civil RICO?

Published in West’s Civil RICO Reporter, November 2018

David J. Stander is an attorney who focuses his practice on civil RICO litigation and consulting. Mr. Stander can be reached at dstanderlaw@gmail.com, and invites you to visit his website at http://www.ricoconsultingattorney.com.

It seems that every defendant alleged to have committed wire fraud or mail fraud in a civil RICO claim relies upon district court holdings which improperly raise the burden on civil RICO plaintiffs. A recent district court case, Bascunan v. Elsaca, 2018 WL 4360780 (S.D.N.Y. 09/06/18, appeal filed 09/14/18), dismissed a civil RICO claim based upon fraud and recited district court cases likening civil RICO to the “litigation equivalent of a thermonuclear device.”
The Bascunan court cites statements by other district courts encouraging the dismissal of RICO allegations at an early stage of the litigation where it is otherwise appropriate to do so. These district courts proclaim that civil RICO claims based upon wire fraud or mail fraud are to merit “heightened scrutiny.”

Supreme Court Views Civil RICO Expansively

These statements conflict directly with the view of the Supreme Court’s interpretation of the legislative history of the civil RICO statute. The expansive view of civil RICO is explained in depth in various Court decisions, most notably in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497 (1985), reversing a dismissal of a civil RICO claim based on mail fraud. In these cases, the Court cites to the legislative history of RICO wherein Congress stated that RICO’s terms are to be “liberally construed to effectuate its remedial purposes.” Pub.L. 91–452, § 904(a), 84 Stat. 947. In Sedima, supra, the Court stated–
The statute’s “remedial purposes” are nowhere more evident than in the provision of a private action for those injured by racketeering activity. See also n. 10, supra. Far from effectuating these purposes, the narrow readings offered by the dissenters and the court below would in effect eliminate § 1964(c) from the statute.
Id., at 498.
The Sedima Court went on to describe that-
RICO was an aggressive initiative to supplement old remedies and develop new methods for fighting crime. See generally Russello v. United States, 464 U.S. 16, 26–29, 104 S.Ct. 296, 302–303, 78 L.Ed.2d 17 (1983). While few of the legislative statements about novel remedies and attacking crime on all fronts, see ibid., were made with direct reference to § 1964(c), it is in this spirit that all of the Act’s provisions should be read. The specific references to § 1964(c) are consistent with this overall approach. Those supporting § 1964(c) hoped it would “enhance the effectiveness of title IX’s prohibitions,” House Hearings, at 520, and provide “a major new tool,” 116 Cong.Rec. 35227 (1970). See also id., at 25190; 115 Cong.Rec. 6993–6994 (1969).
Id.
The Sedima court continued by stating-
The fact that § 1964(c) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct [fraud predicates] is hardly a sufficient reason for assuming that the provision is being misconstrued.
Id. at 499-500.
The Sedima court held that the “extraordinary” uses to which civil RICO has been put (inclusion of wire, mail, and securities fraud) is an issue for Congress and not an appropriate issue for the courts to impose additional requirements. Sedima, supra, 473 U.S. at 500.

Supreme Court Has Rejected Limitations on Civil RICO Actions

In civil RICO cases, the Supreme Court has ruled against imposing any limitations to pleading civil RICO. See, e.g., United States v. Turkette, 452 U.S. 576, 586–587 (1981) (not limiting RICO to only illegitimate enterprises and setting forth an expansive view of an association-in-fact enterprise); Sedima, S.P.R.L. v. Imrex Co., supra, 473 U.S. at 497 (holding there is no requirement that a private action can proceed only against a defendant who has already been convicted of a predicate act or of a RICO violation, and also holding that there is no requirement that a plaintiff in a private action establish a “racketeering injury” as opposed to an injury resulting from the predicate acts themselves); H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 241-243 (1989) (adopting a flexible commonsense approach to finding continuity); National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 257 (1994) (rejecting Seventh Circuit holding that RICO requires proof that either the racketeering enterprise or the predicate acts of racketeering were motivated by an economic purpose); Cedric Kushner Promotions Ltd., v. Don King, 533 U.S. 158, 163 (2001) (holding an individual is “distinct” from his corporate entity and a viable RICO plaintiff based upon either “formal or practical separateness”); Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 652-653 (first-party reliance is not an element of a civil RICO case predicated on mail fraud); Boyle v. United States, 556 U.S. 939, 944 (2009) (affirming the finding of an association in fact enterprise based on concepts that “the very concept of an association in fact is expansive,” and the RICO statute provides that its terms are to be “liberally construed to effectuate its remedial purposes.”) The Boyle Court held an association-in-fact enterprise does not require business-like characteristics, nor requires a hierarchical structure.

Circuits Follow Supreme Court, Liberally Construe RICO

As a result, many circuits have followed Congress’s intent to liberally construe the civil RICO statute, and follow the Supreme Court’s direct instructions to broadly construe civil RICO, even in mail and wire fraud cases. A sample of the circuits follows: Ray v. Spirit Airlines, Inc., 767 F.3d 1220, 1227-28 (11th Cir. 2014) (vacating the dismissal of Plaintiffs’ civil RICO claim tied to Spirit’s Personal Usage Fee because Congress did not expressly or impliedly repeal RICO’s authorization of civil suits based on acts of mail and wire fraud); Odom v. Microsoft Corp., 486 F.3d 541, 546-547 (9th Cir. 2007) (reversing a dismissal of a civil RICO lawsuit alleging wire fraud stating, after review of four Supreme Court cases, the court “takes the general instruction that we should not read the statutory terms of RICO narrowly”); Haroco, Inc. v. American National Bank and Trust Company of Chicago, 747 F.2d 384, 398-399 (7th Cir. 1984) (civil RICO plaintiff need not allege or prove injury beyond any injury to business or property resulting from underlying acts of racketeering); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1100-1101 (2d Cir. 1988) (with these principles [Sedima] in mind, along with Congress’s instructions that we broadly construe the statute, see Pub.L. 91-452, Title IX, Section 904, 84 Stat. 941, the court held that the district court erred when it applied an additional, special requirement of standing to Bankers’ civil RICO claim); Tabas v. Tabas, 47 F.3d 1280, 1297 (3rd Cir. 1995) (in finding a sufficient pattern in a civil RICO claim alleging mail fraud, and rejecting a “garden-variety” defense, the court stated it was “bound, however, by the language of RICO itself and the Supreme Court’s instruction that “RICO is to be read broadly,” citing Sedima, 473 U.S. at 497.

This tug of war between the trial courts and the circuits/Supreme Court creates needless confusion. Suffice it to say, the Supreme Court has uniformly ruled for an expansive view of civil RICO and follows Congress’s intent that the civil RICO statute is to be “liberally construed.” Moreover, the Supreme Court has never imposed “heightened” analysis on civil RICO cases alleging fraud predicates; rather, the Court has rejected any limitations on pleading civil RICO. Many circuits addressing the issue have followed suit. District courts should carefully consider these pronouncements.

Eleventh Circuit Vacates Lower Court Ruling, Distinguishes Plaintiff’s RICO Conspiracy Claim From Common Law Fraud Claim

SunLife Assurance Co. of Canada v. Imperial Premium Finance, ___F.3d ___, 2018 WL 4443054 (11th Cir. Sept. 18, 2018)

Plaintiff alleges that Imperial secured life insurance policies through an unlawful and tortious conspiratorial scheme, alleging (1) conspiracy to commit common law fraud; and (2) conspiracy to violate RICO. Imperial, for its part, contends that its acquisition and ownership of the policies was lawful, and alleges that Sun Life’s attempts to interfere with its ownership of and rights under the policies, including its filing of its lawsuit here, is itself part of Sun Life’s own fraudulent scheme and in breach of the policy contracts.
The alleged conduct underlying both conspiracy claims was the submission of fraudulent life insurance applications to Sun Life. The court first affirmed the dismissal of Sun Life’s fraud conspiracy claim describing that Sun Life’s claim that Imperial conspired with the producers to commit fraud failed because Sun Life did not plausibly allege that the producers and Imperial are independent entities that were capable of conspiring to commit common law fraud as alleged by Sun Life.

However, Sun Life’s claim for RICO conspiracy survives because the “intracorporate conspiracy doctrine,” does not apply to civil claims for RICO conspiracy. Kirwin v. Price Commc’ns Corp., 391 F.3d 1323, 1326–27 (11th Cir. 2004) (“[J]ust as the intracorporate conspiracy doctrine cannot shield a criminal conspiracy from prosecution under the federal criminal code, the doctrine cannot shield the same conspiracy, alleging the same criminal wrongdoing, from civil liability arising under [18 U.S.C. § 1962(d) ].”) And the court disagreed with Imperial’s attacks on the merits of Sun Life’s RICO conspiracy claim, specifically, that Sun Life did not plead (i) an agreement between Imperial and the producers, and (ii) racketeering activity.

First, Sun Life’s complaint easily permits the inference that Imperial and the producers entered into an agreement to effectuate Imperial’s fraudulent plan. As discussed, the complaint contains myriad details of Imperial’s interaction with and direction of the producers with respect to Imperial’s alleged scheme, which included Imperial compensating the producers for their knowing submission of fraudulent applications to Sun Life,. In light of those allegations, an agreement between Imperial and the producers is certainly plausible.

Second, Sun Life pled RICO predicate racketeering acts: the commission of mail and wire fraud, 18 U.S.C. § § 1341, 1343, which “[b]oth … require that a person (1) intentionally participate[d] in a scheme or artifice to defraud another of money or property, and (2) use[d] or ‘cause[d]’ the use of the mails or wires for the purposes of executing the scheme or artifice.” United States v. Ward, 486 F.3d 1212, 1222 (11th Cir. 2007). Sun Life met its burden by alleging that the producers used the United States mail and interstate wire to submit life insurance applications to Sun Life that contained several misrepresentations that induced Sun Life’s issuance of the policies. Sun Life’s reliance on those misrepresentations is supported by the allegation that Sun Life framed the relevant application questions precisely to avoid issuing premium-financed policies or policies intended at the outset for the secondary market. Finally, Sun Life alleged the damages it faced by issuing less profitable premium-financed policies.

Consequently, the court concluded that the district court properly dismissed Sun Life’s fraud conspiracy claim but that it erred in dismissing Sun Life’s RICO conspiracy claim to the extent such claim alleges a conspiracy between Imperial and the producers.

Ed Note: The distinction between common law conspiracy and RICO conspiracy is on display here, explaining that the intra-corporate conspiracy doctrine which restricts a conspiracy between a parent and subsidiary, does not apply to RICO conspiracy. There is a split in the circuits on this issue. Second, although not discussed, RICO conspiracy is broader than the federal general conspiracy statute, and the common law conspiracy doctrine.

Third Circuit Addresses Extraterritorial Application of RICO Statute

Humphrey v. GlaxoSmithKline PLC, 2018 WL 4609108, ___ F.3d ___ (3d Cir., Sept. 28, 2018)

The Third Circuit affirmed the lower court ruling that Plaintiffs did NOT pled sufficient facts to establish that they suffered a domestic injury to its business or property under § 1964(c).

Plaintiffs contended they lost their business as a result of alleged predicate racketeering acts. In RJR Nabisco, the Supreme Court considered “whether RICO applies extraterritorially—that is, to events occurring and injuries suffered outside the United States.” The relevant inquiry involves two separate questions: first, whether RICO’s substantive provisions apply to extraterritorial conduct, and second, whether RICO’s private right of action affords relief for “injuries that are suffered” outside the United States.

The Supreme Court in RJR Nabisco explained that “[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” This presumption against extraterritoriality “avoid[s] the international discord that can result when U.S. law is applied to conduct in foreign countries[.]”It also ensures that Congress—rather than the judiciary—is responsible for navigating the “delicate field of international relations.”

Nevertheless, the Court concluded that RICO can reach extraterritorial conduct, but held that 18 U.S.C. § 1964(c) does not allow recovery for injuries suffered in foreign territories stating that “[n]othing in § 1964(c) provides a clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States.” Thus, the Supreme Court concluded although RICO creates a cause of action for misconduct committed abroad, § 1964(c) requires a “domestic injury.”

The Court discussed that those courts that have considered whether an alleged injury was suffered in the United States have applied varying standards, and thus there is no consensus on what specific factors must be considered when deciding whether an injury is domestic or foreign. RJR Nabisco did advise courts to proceed cautiously when deciding if RICO plaintiffs have alleged a sufficient domestic injury to recover under § 1964(c). The Court engaged in a fact-intensive inquiry to determine where the plaintiff “suffered the injury”—not where the injurious conduct took place, stating that a domestic injury under § 1964(c) is found where the relevant factors, appropriately weighed, establish that the alleged harm was suffered in the United States.

The Court found it was clear that the alleged injuries were suffered in China, and Plaintiffs have not alleged that they possess offices, assets, or any other property in the United States. Thus, Plaintiffs have not alleged a domestic injury pursuant to 18 U.S.C. § 1964(c), even though they do allege loss of goodwill and some unidentified number of actual and prospective U.S. customers. To the extent that these intangible assets were injured, it is not enough to overcome the Supreme Court’s caution against extraterritorial application of domestic law in RJR Nabisco. The court concluded that consequently, the District Court correctly dismissed Plaintiffs’ RICO claims.
The court also rejected the argument that, notwithstanding factors supporting a finding that the alleged injury was foreign, Plaintiffs have nonetheless alleged a domestic injury because “the alleged underlying RICO conduct plainly was both targeted at, and was intended to have substantial effects in, the United States,” distinguishing cases in which it is plausibly argued that Plaintiffs United States-based business was harmed by the defendants’ RICO conduct and that it suffered a domestic injury because it felt the impact of that injury within the United States.

Court Finds Plaintiff Adequately Pleaded Injury from Payment of Legal Expenses, and Adequately Pleaded Section 1962(b) Violations

D’Addario v. D’Addario, ___ F.3d ___, 2018 WL 3848501 (2d Cir., Aug. 14, 2018)

The Second Circuit vacated the District Court’s judgment dismissing in full plaintiff Virginia D’Addario’s RICO claim and related state law claims and remanded the cause for further proceedings in accordance with this opinion. Virginia’s claim, which she asserts both individually and as Executrix of her mother’s estate, arises out of the management of her father’s probate estate (the “Estate”) over several decades by her brother David.
The court held that Virginia’s claim under RICO for legal expenses incurred in pursuing her grievances against David and other defendants is ripe and that she has plausibly alleged that her legal expense injuries were proximately caused by Defendants’ RICO violations.
From the start, Virginia has sought RICO treble damages based on two types of injuries: first, loss of the inheritance she contends that she (and her mother’s estate) would have received from the Estate had David not rendered it insolvent (the parties refer to these as “lost debt” damages); and, second, the more than $200,000 in legal expenses that she incurred in the four years before filing this suit, in her efforts to oppose David’s mismanagement of the Estate and unseat him as Executor (the parties refer to these as “collection expenses”) through various actions pursued in the courts of Connecticut. (David appears to have blocked Virginia’s attempted legal interference on at least one earlier occasion by invoking the promise she made in exchange for the 1987 loan. See D’Addario v. D’Addario, No. 27 86 23, 1991 WL 59744, at *4 (Conn. Super. Ct. Mar. 14, 1991).)

The District Court granted Defendants’ motion to dismiss the Amended Complaint. D’Addario v. D’Addario, No. 3:16cv99 (JBA), 2017 WL 1086772 (D. Conn. Mar. 22, 2017) (Arterton, J.). In a detailed ruling, it determined that Virginia’s claim for “lost debt” damages was not ripe for adjudication under applicable RICO case law because it remained uncertain whether Virginia would receive any distribution from the Estate to offset her claimed damages. This uncertainty made the amount she would ultimately be owed too speculative for recovery and trebling under RICO. The court ruled, in contrast, that her claim for collection expenses already incurred was ripe.
As to those expenses, however, the District Court concluded that the Complaint’s allegations were insufficient to state a civil RICO claim. It explained that Virginia had failed to identify a distinct “acquisition and maintenance” injury, as required to make out a claim based on a violation of section 1962(b). And it explained further that Virginia had failed sufficiently to identify an “enterprise” to support a theory for recovery under section 1962(c). Because the Complaint laid an inadequate basis for finding a violation of either of these subsections, the District Court also rejected Virginia’s claim under section 1962(d) for RICO conspiracy. Having dismissed the only federal claim presented in the Complaint, the District Court declined to exercise supplemental jurisdiction over Virginia’s state law claims.

On review, the Second Circuit concluded that the District Court correctly determined that Virginia’s claim for her share of the Estate’s assets is unripe and that her claim for collection expenses is ripe. We also determine that Virginia has sufficiently alleged that her collection expense injuries were proximately caused by the claimed RICO violations.

However, in contrast to the District Court, the Circuit ruled that Virginia has sufficiently identified a distinct acquisition and maintenance injury under section 1962(b) to support her collection expenses claim with regard to David, Gregory Garvey, and Red Knot, but not with regard to the other defendants. We further conclude that Virginia has also sufficiently alleged a section 1962(c) “enterprise” with regard to all six defendants, supporting her claim for collection expenses on this theory of recovery as well. For these reasons, we vacate the District Court’s dismissal as to Virginia’s RICO claim on her own behalf and on behalf of her mother’s estate for collection expenses and remand that claim and her state law claims for further proceedings consistent with this opinion.

The Court explained that it has long recognized that a plaintiff may recover legal fees, including expenses incurred in one or more attempts to combat a defendant’s RICO violations through the legal system, as damages in a civil RICO action, and thus within that category of cognizable damages. Accordingly, the Court concluded that Virginia’s injuries are not so removed from Defendants’ misdeeds as to place them outside the reach of the proximate causation chain as a matter of law. The expenses that she has incurred to stop the incursion are sufficiently proximate to the identified RICO violations support a claim under section 1964(c).

Also, regarding Section 1962(b) the Court stated that to successfully plead a RICO claim, a plaintiff must indeed allege distinct damages arising from the acquisition or maintenance of control of the enterprise. In other words, those damages must be different from the damages that flow from the predicate acts themselves, and Virginia sufficiently pleaded a separate and distinct “acquisition or maintenance” injury.

Ed. Note: The finding of an acquisition and maintenance injury from control of the enterprise is usually more difficult than the participation injury of section 1962c, and is well-explained by the Court.