Court Affirms Dismissal of Civil RICO Finding No ‘Direct Injury;” Court Does Not Consider Supreme Court Decision in Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 661 (2008)

Ozeran v. Robin Jacobs DBA Law Office of Robin Jacobs Inc., __ Fed. Appx. ___, 2020 WL 777646 (9th Circ., Feb. 18, 2020)

Plaintiff Robert Ozeran appealed the district court’s decision dismissing with prejudice his claims under RICO, and other claims.

Ozeran’s RICO claim was based on the theory that, as a workers’ compensation attorney competing in the same geographic market as the attorney Defendants, he was injured by Defendants’ operation of an unlawful referral scheme under which Defendants would pay “cappers” a monthly fee in exchange for the referral of “an agreed upon minimum number of retained clients per month.” This scheme, according to Ozeran, constituted an enterprise that, together with other related enterprises, was operated by Defendants through a pattern of mail and wire fraud.

The court concluded could not satisfy the proximate causation standards for civil RICO claims.

In order to establish proximate causation, a civil RICO plaintiff must plead and prove that there is “ ‘some direct relation between the injury asserted and the injurious conduct alleged.’ ” citing Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 457, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006) (emphasis added) (finding the plaintiffs claim was too indirect to establish proximate causation. Id. at 456–61, 126 S.Ct. 1991. As the Court explained, the state was the direct victim of the predicate acts of mail and wire fraud, and the plaintiff competitor was injured only indirectly by virtue of the collateral impact of the defendants’ sales-tax cheating on the steel-supply market. Id. at 460–61, 126 S.Ct. 1991. The fact that the defendant carried out the scheme in order to injure the plaintiff did not cure the lack of a direct connection between the alleged RICO violation and the plaintiff’s injuries: “A RICO plaintiff cannot circumvent the proximate-cause requirement simply by claiming that the defendant’s aim was to increase market share at a competitor’s expense.” Id. at 460, 126 S.Ct. 1991.

Ozeran’s RICO claim failed as a matter of law under Anza.  Ozeran does not, and could not, contend that he was the direct victim of the alleged predicate acts of mail and wire fraud on which his RICO claim is based; rather, the direct victims of those fraudulent acts were the recruited clients and the insurance companies from whom the capping scheme was hidden.  The court stated that like the plaintiff in Anza, Ozeran cannot avoid his inability to allege proximate causation by alleging that Defendants’ “aim was to increase market share at a competitor’s expense.” Anza, 547 U.S. at 460, 126 S.Ct. 1991.

Ed Note:   The Ninth Circuit did not consider the more recent Supreme Court decision in Bridge which could serve as a basis for reversal the dismissal of the complaint. In Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 645, 661 (2008),  unlike in Anza and Hemi Group, where other parties suffered more direct injuries than the plaintiffs, in Bridge, the county—which sold tax liens at prices not dependent on who was the buyer—was not injured. Id. at 658. Rather, the plaintiffs were the immediate victims of the defendants’ fraud and were best situated to sue the defendants. Id. Thus, the Supreme Court held that the plaintiffs had sufficiently alleged proximate cause under RICO. Id. at 661, 128 S.Ct. 2131.

Accordingly, the direct link between the RICO violations and the injury asserted can be met under Bridge when it is foreseeable the scheme would cause plaintiffs injury.

 

District Court Finds Association-In-Fact Enterprise Adequately Alleged in Civil RICO Class-Action Litigation and Broadly Construes RICO’s “Conduct” Test

In Re Broiler Chicken Anti-Trust Litigation, 2020 WL 1030674 (N.D. Ill., March 3, 2020)

The court denied defendant Sanderson’s motion to dismiss and found an association in fact enterprise was adequately alleged, and the Defendant Sanderson adequately engaged in the “conduct of the affairs” of that enterprise.

First, the court stated that the heightened pleading standard of Rule 9(b) does not apply to allegations of an “enterprise” under RICO.

Next, plaintiffs had alleged in this class-action that a group of individuals, including Sanderson, known as the Georgia Dock Defendants associated with each other to form and participate in a RICO ‘enterprise.’   The court found the allegations in the Complaint overwhelmingly indicated that the Georgia Dock RICO Defendants conspired to manipulate the Georgia Dock price, whatever their specific means of communication. been noticed. Even though it was possible to manipulate the Georgia Dock price with fewer than all the Georgia Dock RICO Defendants participating, Plaintiffs allegations made it plausible that all the Georgia Dock RICO Defendants colluded to submit prices within a range that took into account the one-cent rule, in order to keep the Georgia Dock price high. The allegations of “relationship” and “purpose” (along with undisputed longevity) were thus sufficient to plausibly allege an “enterprise.”

The court rejected Sanderson’s argument the enterprise was not separate from a “pattern of racketeering activity” because the Supreme Court in Boyle  has said that “the evidence used to prove the pattern of racketeering activity and the evidence establishing an enterprise may in particular cases coalesce.” Boyle, 556 U.S. at 947 (emphasis added). That is true of Plaintiffs’ allegations in this case. Plaintiffs’ allegations plausibly show both common and concerted unlawful activity, because the Georgia Dock price would not have remained high above other prices unless at least a weighted majority of the Georgia Dock RICO Defendants agreed to submit higher prices within a range that avoided being knocked out by the one-cent rule. Sanderson also notes that the Supreme Court has emphasized that allegations of a pattern of racketeering activity “would not be enough to show that the individuals were members of an enterprise,” if the individuals acted “independently and without coordination.” But here, the racketeering activity alleged permits the plausible inference that the fraudulent price submissions were coordinated.

Thus, the allegations do not “collapse” the “two statutory elements” into “one.” It simply acknowledges, as has the Supreme Court, that sometimes the same allegations can be a basis to show both racketeering activity and an enterprise. Despite Sanderson’s argument, this was an uncontroversial conclusion that has been reached by a number of courts.

Thus, the evidence cited in the complaint (both documentary and testimonial), showed that the five Georgia Dock RICO Defendants’ price submissions were always within one cent of the previous week’s price, and were very rarely lower than the previous week’s price plausibly indicating an agreement among those five Georgia Dock RICO Defendants.*4.

Lastly, Sanderson argued in passing that Plaintiffs have failed to allege that Sanderson “conducted” the enterprise, which is another element of the claims.*5.  But Sanderson is “alleged to be part of the enterprise itself,” which is sufficient to allege “conduct” under RICO. MCM Partners, Inc. v. Andrews-Bartlett & Assocs., Inc., 62 F.3d 967, 979 (7th Cir. 1995). The allegation of Sanderson’s express agreement with the other Georgia Dock RICO Defendants to submit fraudulent prices to the Georgia Dock, which the Court finds Plaintiffs have plausibly alleged, is sufficient to allege “conduct.” See In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 378 (3d Cir. 2010) (“[I]f defendants band together to commit [violations] they cannot accomplish alone … then they cumulatively are conducting the association-in-fact enterprise’s affairs, and not [simply] their own affairs.”).

Ed Note:   The Seventh Circuit’s district courts sometimes take a very hard line on civil RICO elements, such as the “pattern of racketeering” element, not addressed herein, but an expansive, and yet correct interpretation of an ‘association in fact enterprise.’

 

 

Second Circuit Affirms Dismissal of Civil RICO Finding Insufficient Continuity When Plaintiff Alleges Multiple Racketeering Acts Pursuant to a Single Discreet Scheme to Defraud

Liang v. Home Reno Concepts, LLC, __ Fed. Appx. ___, 2020 WL 747941 (2d Cir., Feb. 14, 2020)

The Court dismissed Plaintiffs second amended complaint which alleged civil RICO violations.  Defendants’ company, Home Reno, although it marketed itself as “fully licensed and insured,” was never actually licensed to provide home renovation services in either New York City or Nassau County, nor was it “fully … insured.”

In July 2016, after viewing Home Reno’s website and speaking with Home Reno owners, Liang hired Home Reno to renovate her home’s flooring, lighting, and upstairs bathroom and install a new heating system. The renovation projects were not successful and the heating system was never activated. When Liang called Home Reno to ask if someone could turn on the system, she was told that she still had an unpaid balance, which was not true, and that Home Reno would only send someone if she paid additional money. The other renovations were also not satisfactory. Liang and her family ultimately paid someone else to redo the work.

The Complaint alleged mail fraud and wire fraud in the form of false and misleading statements posted on defendants’ website, Yelp.com, and print advertisements, and extortion in defendants’ demanding of additional payment for turning on Liang’s home heating system. The district court dismissed Liang’s mail and wire fraud claims for a failure to allege fraudulent intent, and Liang’s extortion claim because a single act cannot constitute a pattern under RICO § 1962(c),

The Court affirmed the dismissal of Liang’s RICO claims because the conduct at issue, while arguably fraudulent (defendants represented they were fully licensed and insured when they were not), did not constitute “a pattern of racketeering activity.”  The Court relied on an earlier decision, Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 97 (2d Cir. 1997) where the court affirmed the dismissal of the RICO claim for lack of continuity — there was only “one purportedly fraudulent act: the negotiation of the [licensing] Agreement.” 119 F.3d at 98.

Here, the allegations in the Complaint likewise arose from a single act — Liang’s contracting with defendants to perform home renovation services. The court found Liang’s attempt to stretch this sole act into seven discreet acts, which she contends include defendants’ statements on their website, Yelp.com page, and print newsletter, as well as their sending her an email demanding an “invalid payment,” unavailing.  The Court stated that “courts must take care to ensure that the plaintiff is not artificially fragmenting a singular act into multiple acts simply to invoke RICO.” 119 F.3d at 98. In this case, Liang’s allegations stemmed from a single, allegedly fraudulent act and could not form the basis for a civil RICO claim.

Ed Note:   This case would likely fail closed-ended continuity for multiple reasons, e.g., lack of multiple victims, lack of amount of time the fraud existed etc.  But is noteworthy the Court is following the position of the Department of Justice which states that multiple individual mailings, wirings, and demands in furtherance of a “single discrete scheme” to defraud one victim is not sufficient to constitute multiple racketeering acts.   This does conflict with H.J. Inc. as written which does not require multiple schemes to show continuity.

 

Third Circuit Concludes that Civil RICO section 18 U.S.C. § 1965(b), not Section 1965(d), Applies to Determine Personal Jurisdiction over Defendants from a Neighboring State

Laurel Gardens LLC v. McKenna, 948 F.3d 1051 (3rd Cir. 2020)

The Appeals court vacated the order entered by the District Court disposing of the parties’ dismissal motions to the extent that it granted certain Defendants’ (Isken Defendants) motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2) as well as the District Court’s Rule 54(b) order insofar as it designated this prior order as the final judgment as to the Isken Defendants.

The case was brought in the Eastern District of Pennsylvania, although it is undisputed that Defendants Isken are residents of the State of Delaware and that IE is a Delaware limited liability company with its principal place of business located in Newark, Delaware.

The Court of Appeals concluded that 1965 subsection (b) (and not subsection (d)) applies here. In turn, Plaintiffs satisfied the statutory (and constitutional) requirements for the exercise of personal jurisdiction over the Isken Defendants. Furthermore, Plaintiffs’ state law claims then fall under the doctrine of pendent personal jurisdiction.

The Court agreed with Plaintiffs that the issue of personal jurisdiction under the RICO provision is properly before the Court.  Under the circumstances, the Court limited its ruling to this threshold jurisdictional issue under Rule 12(b)(2) and therefore refrained from considering whether Plaintiffs fail to state a claim upon which relief can be granted under Rule 12(b)(6).

The Appeals court discussed there is a circuit split regarding which specific subsection of the RICO provision governs the exercise of personal jurisdiction in this case. Plaintiffs recognize that two circuits (the Fourth and the Eleventh Circuits) have looked to § 1965(d). According to the Eleventh Circuit, “Section 1965(d) of the RICO statute provides for service in any judicial district in which the defendant is found.” Republic of Panama v. BCCI Holdings (Lux.) S.A., 119 F.3d 935, 942 (11th Cir. 1997). Citing Republic of Panama, the Fourth Circuit reached the same conclusion. ESAB Grp., Inc. v. Centricut, Inc., 126 F.3d 617, 626 (4th Cir. 1997).

Five circuits (the Second, Seventh, Ninth, Tenth, and D.C. Circuits) (the Majority) have stated that subsection (b) governs nation-wide service of process and personal jurisdiction over “other parties.” See FC Inv. Grp. v. IFX Markets, Ltd., 529 F.3d 1087, 1098-1100 (D.C. Cir. 2008) Cory v. Aztec Steel Bldg., Inc., 468 F.3d 1226, 1229-33 (10th Cir. 2006)PT United Can Co. v. Crown Cork & Seal Co., 138 F.3d 65, 70-72 (2d Cir. 1998)Lisak, 834 F.2d at 671-72Butcher’s Union Local No. 498 v. SDC Inv., Inc., 788 F.2d 535, 538-39 (9th Cir. 1986). 

Holding–  The Third Circuit agreed with the majority approach based on the language and structure of the RICO provision itself as well as the relative absence of reasoning in support of the minority position. The history of the legislation and the Circuit’s own prior case law provide further support for this majority approach.

The Court stated that reading all of the subsections of § 1965 together, the court found that § 1965 does not provide for nationwide jurisdiction over every defendant in every civil RICO case, no matter where the defendant is found.

First§ 1965(a) grants personal jurisdiction over an initial defendant in a civil RICO case to the district court for the district in which that person resides, has an agent, or transacts his or her affairs. In other words, a civil RICO action can only be brought in a district court where personal jurisdiction based on minimum contacts is established as to at least one defendant.  

Second, § 1965(b) provides for nationwide service and jurisdiction over “other parties” not residing in the district, who may be additional defendants of any kind, including co-defendants, third-party defendants, or additional counter-claim defendants. This jurisdiction is not automatic but requires a showing that the “ends of justice” so require.

Going further, subsection (c) “simply refers to service of subpoenas on witnesses”—specifically in civil or criminal actions or proceedings instituted by the government. Id.

Finally, “subsection (d)’s reference to ‘ “all other process” ’ must mean process different than a summons or a government subpoena, both of which are dealt with in previous subsections.” Cory, 468 F.3d at 1230 (quoting PT United, 138 F.3d at 72).

The circuit courts adopting the minority approach did not offer a detailed explanation for their selection of subsection (d).

The structure of § 1965 as well as the “other parties” language of subsection (b) clearly require the presence of at least one defendant that meets the traditional contacts test. With the apparent exception of the Seventh Circuit, see Lisak, 834 F.2d at 671-72, the circuit courts following the majority approach have adopted this requirement.

“Where Congress has statutorily authorized nationwide service of process, such service establishes personal jurisdiction, provided that the federal court’s exercise of jurisdiction comports with Fifth Amendment due process.” Cory, 468 F.3d at 1229 (citing Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th Cir. 2000)); see also, e.g., In re Automotive Refinishing Paint Antitrust Litig., 358 F.3d 288, 297-99 (3d Cir. 2004)Pinker, 292 F.3d at 368-71. Having determined that “the ends of justice require” the Isken Defendants “be brought before” the District Court under § 1965(b), we have no difficulty concluding that the District Court’s exercise of personal jurisdiction over them comports with the Fifth Amendment. In this context, we are not limited to the defendant’s contacts with the forum state and instead consider contacts with the nation as a whole.

The Court concluded that the District Court’s exercise of personal jurisdiction over defendants from a neighboring state does not offend traditional notions of fair play and substantial justice.

 

Circuit Split on Closed-Ended Continuity in Civil RICO is Clear! This Case Should Be Appealed

Grace International Assembly of God v. Festa et al ___Fed. Appx. ___, 2019 WL7293871 (2d Cir. 2019)

The Second Circuit follows existing precedent in the Circuit to affirm the dismissal of a civil RICO complaint finding that the plaintiffs did not adequately plead acts sufficient to meet the “continuity” requirement for pattern. As the primary basis for its racketeering claim, Grace alleged that Defendants committed numerous counts of wire fraud, in violation of 18 U.S.C. § 1343, during the course of a construction project commissioned by Grace.

The Circuit court did not find racketeering activities which “amounted to or pose a threat of continued criminal activity.”  To meet this so-called “continuity” requirement, a “plaintiff in a RICO action must allege either an open-ended pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a closed-ended pattern of racketeering activity (i.e., past criminal conduct extending over a substantial period of time).”

  1. Closed-ended Continuity

The Court stated that “[t]o satisfy closed-ended continuity, the plaintiff must prove ‘a series of related predicates extending over a substantial period of time.’ ”  Since the Supreme Court decided H.J. Inc., we have never found predicate acts spanning less than two years to be sufficient to constitute closed-ended continuity. “[W]hile two years may be the minimum duration necessary to find closed-ended continuity, the mere fact that predicate acts span two years is insufficient, without more, to support a finding of a closed-ended pattern.”

The court must also consider the number and variety of predicate acts, the presence or absence of multiple schemes, and the number of participants and victims. Plaintiffs allegations that the acts took place for a period extending longer than two (2) years was not sufficient because the scheme involved few victims and fewer perpetrators.

Editor Note:  These extra requirements are not mandated nor required by the Supreme Court in H.J. Inc., and ignores the Supreme Court principle that civil RICO is to be liberally construed.   These conditions are not required in some other circuits, most notably, the Third Circuit, the Sixth Circuit, and the Ninth Circuit, all of which have explicitly held that a plaintiff is not required to plausibly allege multiple schemes and multiple victims to show closed ended continuity, nor show ongoing conduct to meet the closed-ended prong.  Meanwhile, the Seventh Circuit more closely stands with the Second Circuit.    [Specific case cites will be provided in an upcoming published article].

This conflict in the circuits support the Supreme Court taking another view.

  1. Open-ended Continuity

There are two ways to show open-ended continuity – (1) “where the acts of the defendant or the enterprise [are] inherently unlawful, such as murder or obstruction of justice, and [are] in pursuit of inherently unlawful goals, such as narcotics trafficking or embezzlement,”  or (2) “where the enterprise primarily conducts a legitimate business” but there is “some evidence from which it may be inferred that the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity,”  The allegation of a scheme that was inherently terminable does not plausibly imply a threat of continued racketeering activity.

The court found that Plaintiffs failed to allege the first type of open-ended continuity, which primarily targets organized crime, and failed the second type as the plaintiff did not adequately identify that the nature of the predicate acts implied a threat of continuing activity nor adequately allege the “regular way of doing business.”  Thus, the court concluded in reality this was one scheme with one clear victim, and clearly insufficient to establish a pattern for the purposes of RICO.

Ed. Note:    The requirement for open-ended continuity – (1) “where the acts of the defendant or the enterprise [are] inherently unlawful, such as murder or obstruction of justice, and [are] in pursuit of inherently unlawful goals, such as narcotics trafficking or embezzlement” is also not a requirement set forth in H.J. Inc.   The language is taken from a criminal RICO case to find continuity in such a circumstance.

 

 

 

 

 

 

District Court Judge Denies Defendant’s Motion to Dismiss A Civil RICO Claim Finding Enterprise and Pattern of Racketeering Adequately Pleaded

Foster et al v. Attias, et al., 2019 WL 676402 (E.D. Pa., Dec. 11, 2019)

Judge Goldberg issued a thorough and thoughtful opinion in denying Defendant Moshe Attias’s motion to dismiss a civil RICO claim. The Amended Complaint alleges a pattern of racketeering activity conducted by Attias through an association in fact enterprise of various LLCs of which he is the owner, including Unity Loft, LLC and Lippincott Lofts, LLC. Defendant used these entities to siphon money from Plaintiffs through various real estate transactions. The Judge concluded the allegations give rise to an actionable claim for relief under RICO.

A. RICO Enterprise

1. Distinctness Between Individual Person and Enterprise Found

First, the Judge found “distinctness.” The Amended Complaint (AC) alleged an enterprise consisting of Defendant/Individual Attias’ companies and himself as an individual. The Judge stated that it is well-settled that an “association-in-fact” enterprise may consist of a corporation together with non-employee individuals. Moreover, a RICO enterprise “may be comprised only of defendants, or of defendants and non-defendants.” *4 citing to United States v. Urban, 404 F.3d 754, 782 (3d Cir. 2005).

Defendant Attias challenged the distinctness between the enterprise and the individual defendant but the Judge correctly cited to Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001) and Third Circuit law to find the Amended Complaint plausibly pleaded both a “person” and a distinct “enterprise.” The RICO cause of action has been brought against Defendant Attias as a “person” within the meaning of 18 U.S.C. § 1961(3) and § 1964(c). Thus, the “enterprise,” an association-in-fact consisting of Attias together with the separate legal entities of which he is the owner, including Unity Loft, LLC and Lippincott Lofts, LLC. was distinct from Attias, the person.

2. Association in Fact Enterprise Adequately Alleged

The Judge found the enterprise was properly alleged. The Amended Complaint goes on to contend that the enterprise, “an association in fact of an individual and legal entities, has a structure separate and apart from the pattern of racketeering activity in which Defendant engaged.” Finally, the Amended Complaint asserted that “members and associates of the Enterprise, an association in fact enterprise, functioned together as a continuing unit, with a common purpose for the economic benefit and gain of the RICO Defendant Attias.” At this stage of the litigation, these allegations plausibly plead RICO’s second element of enterprise.

Defendants urged that these allegations are insufficient because the Amended Complaint does not identify acts engaged in by Defendant Unity or any non-parties towards a common purpose. They assert that Defendant Unity and non-party Lippincott Lofts, LLC “were each only involved in one of the many transactions in dispute and therefore can neither be part of the RICO enterprise nor can they have engaged in a pattern of racketeering activity.” Without citation to any authority, Defendants contend that absent allegations that each of the members of the enterprise participated in each of the challenged transactions, no RICO enterprise exists.

The Judge rejected this argument citing to Boyle v. United States, 556 U.S. 938 (2009), wherein the Supreme Court noted that an association-in-fact enterprise “need not have a hierarchical structure or a ‘chain of command’; decisions may be made on an ad hoc basis and by any number of methods—by majority vote, consensus, a show of strength, etc. Members of the group need not have fixed roles; different members may perform different roles at different times.” Id. at 948.

In compliance with Boyle principles, the Amended Complaint alleges that the enterprise acted outside the normal affairs of a business relationship and “functioned for the purpose of defrauding Plaintiffs and enriching the Enterprise’s members and associates through falsely claiming that funds provided by Plaintiffs would be used to acquire and develop real property but instead were used for Defendants’ personal enrichment.” In furtherance of this scheme, Plaintiff alleges that Defendant Attias used fraudulent communications to cause Plaintiffs to wire funds to Attias under the representation that the properties acquired with the funds would be placed in Plaintiff Foster’s name, even though Attias actually used the funds to purchase the properties in the name of enterprise members Unity and Lippincott Lots, LLC.

Given that these allegations sufficiently plead both a “person” and a distinct RICO “enterprise,” the Judge declined to dismiss the RICO count on this ground.

B. Pattern of Racketeering Activity

1. Only The Person Named as Defendant Need Commit Acts

The Judge rejected the Defendant’s argument that the RICO claim cannot survive because Plaintiffs do not sufficiently plead a pattern of racketeering activity underlying Plaintiffs’ claims in this action. Here, Plaintiffs alleged predicate acts of racketeering activity involving fraud. Defendants now contend that, “[a]t most, Plaintiffs’ factual averments infer only that one individual, Defendant Attias, allegedly made certain statements and received certain payments by wire transfer. There is no fact asserted that any other individual or entity, including Defendant Unity, committed any predicate act, let alone the two predicate acts necessary to establish a pattern of racketeering activity.” In turn, Defendants claim that the unilateral actions of only Defendant Attias cannot establish a pattern of racketeering activity.

The Judge found that contrary to Defendants’ argument, however, Plaintiffs need not allege that more than one individual or entity that is part of the enterprise committed a predicate act. Rather, RICO liability requires a showing that the defendant participated in the conduct or affairs of the enterprise “through a pattern of racketeering activity that must include the allegation of at least two racketeering acts.”

Here, the RICO cause of action is brought only against Attias as a “person” acting through an “enterprise” that includes non-RICO Defendant Unity and non-party Lippincott Lots, LLC. As such, it is only Attias, as the sole RICO Defendant, who must commit the predicate acts and conduct the enterprise’s affairs through a pattern of racketeering.

2. Closed Ended Continuity Found for Conduct of 20 Months

According to the Amended Complaint, Defendant Attias satisfied this requirement by using multiple interstate wires to defraud Plaintiffs of millions of dollars, all of which were done close in time, were related, and occurred over a substantial period of time (from April 2016 through January 2018). Note: This finding of closed ended continuity based on a closed period of time of about 20 months is significant.

Because Defendants have not cited any authority for the proposition that all members of the enterprise—whether or not defendants in the RICO claim—must commit at least two predicate acts, the Judge denied their motion for dismissal.

Ed. Note: David J. Stander Esq. focuses on civil RICO litigation. Along with named counsel, Mr. Stander provided assistance in the litigation of the above claim, including substantial assistance drafting the Amended Complaint and Plaintiffs’ Response memorandum.

Eleventh Circuit Opens the Door to Potential Civil RICO Lawsuits Based on Extortionate Litigation Activity

Demartino v. Town of Gulf Stream, __ F.3d __, 2019 WL 6207952 (11th Cir. Nov. 21, 2019)

The court affirmed the Defendant’s (Town of Gulfstream) motions for summary judgment finding that there was a probable cause for the Town to file a civil RICO lawsuit, even though the Court in a prior proceeding affirmed the dismissal of the civil RICO action, carving out an exception to the general rule.

Earlier Lawsuit

In year 2015, the Town alleged that plaintiff DeMartini and co-defendant O’Boyle and others “pummeled the town with nearly 2,000 public records requests, many of them frivolous, with no intention of actually reviewing the results.” Id. The Town also alleged that, if the Town failed to timely respond then the O’Boyle Law Firm would sue the Town, allegedly “engag[ing] in a pattern of frivolous litigation activity.” Id. at 441, 444. The O’Boyle Law Firm was formed by O’Boyle’s son, funded by O’Boyle, and was in the same building as O’Boyle’s real estate company. Thus, the Town and a contractor (Wantman) filed a civil suit against DeMartini, and others, alleging violations of RICO, 18 U.S.C. §§ 1962(c).

Upon motion to dismiss by the defendants, the federal district court dismissed the Town and Wantman’s class action RICO complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court concluded that the defendants’ filing lawsuits, or even threatening to sue, did not constitute a predicate act under RICO. In so ruling, the district court relied on Eleventh Circuit precedent in Raney v. Allstate Ins. Co., 370 F.3d 1086, 1087–88 (11th Cir. 2004) (holding that the filing of a lawsuit did not state a claim for extortion as a predicate act under RICO), and United States v. Pendergraft, 297 F.3d 1198, 1207 (11th Cir. 2002) (holding that neither the threat to litigate nor the fabrication of evidence behind the threat of a lawsuit made the action “wrongful” within the meaning of the Hobbs Act, and, thus, could not be a predicate act under RICO).

The Court in its earlier decision, 654 Fed. Appx. 439 (11th Cir., June 21, 2016) found the conduct of Demartino “troubling,” but still affirmed given the precedent in the circuit.

Current Proceeding

 

In this proceeding, DeMartini filed the instant § 1983 action against the Town and Wantman arguing the RICO lawsuit constituted unlawful retaliation against her. As to her § 1983 First Amendment retaliation claim, DeMartini alleged that the speakers at the Town’s October 2014 Commission meeting made clear that the Town was not concerned with the merits of its RICO lawsuit or its likelihood of success and thus the Town lacked probable cause to initiate its civil RICO lawsuit against DeMartini. DeMartini contended that the Town’s RICO action was “baseless” and frivolous given Eleventh Circuit precedent that a threat to file a civil lawsuit is not a valid RICO predicate even if the plaintiff was using the litigation for extortionate purposes.

 

The Court found that prior to filing its RICO action, the Town obtained substantial information that supported a reasonable belief that DeMartini and others had committed fraud through their participation in an extortionate scheme involving fraudulent public records requests, false settlement demands, and subsequent multiple lawsuits designed to obtain attorney’s fees as opposed to the requested records known as a “windfall scheme.” The scheme involved two steps: (1) pummeling the Town with voluminous and intentionally vague public records requests that were designed to elicit either no response, an incomplete response, or an untimely response, and then (2) demanding that the Town pay an excessive settlement to avoid litigation under Florida’s public records law, including demanding attorney’s fees in excess of the fees and costs the O’Boyle Law Firm actually incurred to settle the case.

 

This Court did reiterate precedent in Pendergraft and Raney precluded the Town’s theory that a RICO action could be based on DeMartini’s litigation activity, and thus eliminated any probable cause it may have had for asserting a RICO claim. But, the court rejected DeMartini’s argument. Pendergraft and Raney made it unlikely, but not impossible, for the Town to succeed. The Town had a reasonable belief that there was a legitimate and material distinction between their RICO claim and the ones that came before it in that O’Boyle, DeMartini, and others had abused their statutory right to request public documents from the government “on a grand scale.” Given the huge number of requests and the obvious pattern that they were being filed to strip the Town of money while allowing the O’Boyle Law Firm to profit handsomely, it was not unreasonable for the Town to believe in good faith that this Court might carve out an exception to the general rule.

 

The Town had a mountain of fraudulent and extortionate conduct to present in the hopes of creating an exception to the general rule in Pendergraft and Raney. Consequently, there was no merit to DeMartini’s contention that the Town lacked a reasonable belief that it might prevail in the RICO lawsuit, and the Court concluded the Town had probable cause to file the civil RICO lawsuit.

 

David J. Stander is an Attorney who focuses on Civil RICO litigation.

Seventh Circuit is Wrong: Closed-Ended” Continuity in a RICO Action Does Not Require Pleading An Implicit Threat of Future Harm; Court Ruling is in Direct Contravention of Supreme Court Precedent

Menzies v. Seyfarth Shaw LLP, __ F.3d __, 2019 WL 5884481 (7th Cir. 2019)

 

The Seventh Circuit affirmed the dismissal of a civil RICO suit finding inadequate allegation of “continuity” sufficient to find a pattern of racketeering. At issue was whether Menzies adequately pleaded the continuity dimension of the continuity-plus-relationship test. The court stated that doing so requires “(1) demonstrating a closed-ended series of conduct that existed for such an extended period of time that a threat of future harm is implicit, or (2) an open-ended series of conduct that, while short-lived, shows clear signs of threatening to continue into the future.” *5, citing case.

 
The court discussed closed-ended continuity further and stated that to ascertain the presence of a so-called “closed-ended” series of misconduct—asks whether there were enough predicate acts over a finite time to support a conclusion that the criminal behavior would continue. The focus, therefore, is on “the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries.”

 
The Court’s view at best breeds confusion and is arguably incorrect and in direct contravention of the Supreme Court’s holding in H.J. Inc. v. Northwestern Bell, 492 U.S. 229, 242 (1989) wherein the court stated as follows with regard to closed-ended continuity:

 
A party alleging a RICO violation may demonstrate continuity over a closed period, by proving a series of related predicates extending over a substantial period of time.
In discussing “closed-ended continuity” the Court did not express that these “serious of related predicates” require acts which themselves carry the threat of continuing into the future. In fact, various circuits have found closed-ended continuity satisfied without finding that the predicates carry the implicit threat of harm into the future when the scheme has been completed and there was a series of related predicates which had occurred over a substantial period of time.

 
In fact, if Menzies was the rule, closed-ended continuity would be a nullity as any long-running scheme by a defendant that has been completed would fail the closed-ended test because the completed fraudulent acts did not carry with them “a threat of future harm.” This is particularly true for completed mail and wire fraud schemes which do not carry an implicit threat of continued activity. The goal of Menzies is to drive “mail and wire fraud” schemes out of civil RICO, which is also in direct contravention of Supreme Court law which liberally construes RICO. Sedima.

 
Unlike mail and wire fraud schemes, most violent crimes (extortion; murder etc.) carry with them the implicit threat of continuing into the future to satisfy both the closed-ended and open-ended test. But again, the mail and wire fraud scheme would not be sufficiently alleged to meet either the closed ended or open-ended test when the goal of the scheme has been completed, or terminable by a certain date, even if there was a series of related predicates over a substantial period of time. Thus, under Menzies such fraud schemes, unless continuing to the present day, would not carry with it an implicit threat of future harm and fail to satisfy both closed-ended and open-ended continuity, and not constitute a pattern.

 
Accordingly, under Menzies, long running fraud schemes which have been completed would fail the closed-ended, and open-ended test, and fail to be actionable as a pattern. This is not the intent of the drafters of the statute or the Supreme Court.

 
David J. Stander is an Attorney who focuses on civil RICO litigation.

Court Dismisses Civil RICO Suit Brought by an Employer Alleging Extortionate Acts by a Local Union When There Was No Violence or Threats of Violence.

CareOne Management LLC v. UnitedHealthcare Workers East, SEIU 1199, 2019 WL 554140 (D. N.J. Oct. 28, 2019)

Court Dismisses Civil RICO Suit Brought by an Employer Alleging Extortionate Acts by a Local Union When There Was No Violence or Threats of Violence.

The court denied Plaintiffs’ motion for summary judgment and granted Defendants’ motion for summary judgment in this lawsuit brought by CareOne Management LLC against the labor union SEIU 1199, finding insufficient evidence of extortion and mail/wire fraud resulting from the defendants’ organizing and negotiation tactics.

Plaintiffs alleged Defendants engaged in extortion and fraud in violation of federal and state law, and alleged civil RICO violations and other violations. The SAC alleged that Defendants used force and violence in concert with unlawful economic pressure to force Plaintiffs to accede to Defendants’ bargaining and unionization demands, including “(1) engag[ed] in vandalism and other criminal acts to endanger patients and … bring about negative outcomes before the Connecticut regulatory authorities; (2) disseminat[ed] false, misleading, and defamatory information about Plaintiffs …; (3) publicly smear[ed] [Straus] and his other businesses …; and (4) abus[ed] the legal process ….”.)

Extortion

The court first clarified that “violations of state extortion statutes may qualify as RICO predicate acts, if such violations are also ‘capable of being generically classified as extortionate.’

 

Plaintiffs alleged that Defendants used demonstrations/protests and regulatory and legal processes to wrongfully pressure Plaintiffs into complying with illegitimate bargaining and unionization demands. Defendants concede that they used those tactics to put economic pressure on Plaintiffs, but dispute that neither the ends they sought or the means by which they pursued them were wrongful. The court stated that “unlike the use or threatened use of force or violence, the use of economic fear in business negotiations between private parties is not ‘inherently’ wrongful” and “the fear of economic loss is a driving force of our economy that plays an important role in many legitimate business transactions.” *4, citing case.. The threat of economic loss may constitute “fear” for purposes of an extortion analysis, but it does not include “the fear of economic loss in the context of hard business bargaining ….” The court found that the evidence would not permit a reasonable jury to conclude that defendants pursued illegitimate ends in the collective bargaining or unionization process. Because it is not unlawful to pursue “a union contract calling for higher wages and other monetary benefits.” cting to the seminal case United States v. Enmons, 410 U.S. 396, 409 (1973).

 

The court then found the tactics employed by Defendants in pursuit of their collective bargaining and unionization goals, their participation in regulatory processes was not improper. Further, the protests and demonstrations Defendants engaged in were peaceful, did not involve violence or threats of violence, and did not result in arrests or criminal charges being brought against any person or entity. (emphasis added).   Therefore, the court found that there is no genuine issue of material fact as to whether Defendants’ actions were wrongful yet recognizing “intense and coercive measures” adopted by the parties.

 

Mail & Wire Fraud

 
Plaintiffs next claim that a “central feature” of the Campaign included using the COW, flyers, and media advertisements to “disseminat[e] … false, misleading, and/or incendiary allegations regarding” Plaintiffs’ business and labor practices and Straus’s personal and professional life with the goal of depriving Plaintiffs “of their property by deceiving third-parties into believing that Plaintiffs are bad health care providers …”

 
In so doing, Plaintiffs allege that Defendants committed mail and/or wire fraud.
The elements of wire/mail fraud are: (1) a scheme or artifice to defraud, (2) culpable participation by the defendant (i.e., specific intent to defraud), and (3) use of the mails or wire transmissions to effectuate the scheme. Additionally, the object of the alleged scheme or artifice to defraud must be a traditionally recognized property right.”

 
The court stated that Plaintiff did not produce admissible evidence from which a reasonable jury could conclude that Defendants had the specific intent to deceive finding that the record is clear that the individuals who researched, drafted and/or approved the challenged publications believed their contents to be truthful. While the Campaign may have used forceful, critical, hyperbolic, and sometimes satirical statements regarding Plaintiffs’ practices and Straus’s actions, that is not the same as publishing false or misleading statements with the intent to deceive the public. As such, there was no genuine issue of material fact as to Defendants’ culpability for mail and/or wire fraud.

 
Ed. Note: The court is focusing on the Enmons standard which allows a union to conduct campaigns without violating Hobbs Act extortion provided there is no violence or threats of violence.

District Court Dismisses Civil RICO Amended Complaint Finding the PSLRA Amendment Barred Plaintiffs’ RICO Claim Regardless of Whether there Were Other Predicates Based on Conduct Not Actionable As Securities Fraud

Awad et al v. Sharif Omar and Sami Omar, 2019 WL 5727327, (S.D.N.Y., Nov. 5, 2019)

The Court granted the Defendants’ motions to dismiss the first amended complaint. The amended complaint alleged that Defendants deceived Plaintiffs (two sisters) into signing “shareholder transfer and other corporate documents” pursuant to which they sold their stock in two companies, Liptis USA and Liptis Holding, to those entities “for little or no consideration” and then defendants purchased it from the Liptis entities “for little or no consideration.” After defendants acquired the shares, Sharif allegedly “coerced” Sami “through threats and extortion” into giving Sharif all of his shares of Liptis USA and Liptis Holding. Plaintiffs contend that after defendants defrauded their sisters of their Liptis USA stock, defendants “caused their accountants to fraudulently report in the [s]isters’ federal tax returns that the payments were for the purported sale of the [s]isters’ shares of stock of Liptis.”

The amended complaint also alleges that from 2009 through 2017, defendants defrauded various lenders into issuing mortgages on the properties owned by Liptis, New Life, and Omar Holding, and then misappropriated the proceeds.

The court discussed that “[s]ection 107 of the PSLRA – which was enacted as an amendment to the RICO statute and accordingly is often referred to as the ‘RICO Amendment’ – provides that ‘no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962.’ ” MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268, 273 (2d Cir. 2011) (quoting 18 U.S.C. § 1964(c)). The RICO Amendment not only “ ‘eliminate[s] securities fraud as a predicate offense in a civil RICO action,’ ” but it also “bar[s] a plaintiff from ‘pleading other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud.’ ”

The court discussed that the RICO Amendment applies expansively and where plaintiffs allege ‘a single scheme,’ courts have held that ‘if any predicate act is barred by the PSLRA it is fatal to the entire RICO claim.’ The court found that the Plaintiffs allegations amounted to a course of conduct which amounts to a single scheme. As part of this scheme, plaintiffs allege that defendants defrauded the sisters into selling their Liptis USA stock, which fraud was plainly actionable as securities fraud.

Given this clear assertion of a securities fraud, plaintiffs’ reliance on certain alleged mail and wire frauds was unavailing.*4. The RICO Amendment accordingly barred plaintiffs’ RICO claim, and did so regardless of whether the other predicate acts that plaintiffs allege are based on conduct that is not actionable as securities fraud. *5, citing cases. The court stated that allowing such surgical presentation of the cause of action here would undermine the congressional intent behind the behind the RICO Amendment.” (internal quotation marks omitted)).

Ed Note: David J. Stander Esq. provided consulting services to the prevailing party in this matter. As mentioned, Defendant Sharif Omar presented numerous other arguments in support of his motion to dismiss which were not considered in the decision.