Court Finds Plaintiff Did Not Adequately Plead a Pattern of Racketeering When Predicate Acts of Fraud Were Incidental to Another Predicate Violation, here, the Alleged Abstraction of Assets of an ERISA Plan

Poppi Metaxas v. Kenneth Lee, et al., 2020 WL 7025095 (E.D. Cal., 11/30/20)

Plaintiff Poppi Metaxas alleged RICO violations against nine defendants (“Defendants”), all employees or former employees of the community bank she once ran as CEO. Ms. Metaxas alleges that Defendants have “denied her claim for retirement benefits as part of a long-running criminal scheme to inflate the bank’s assets with funds set aside for her retirement plan.” 

The Court presented some interesting and novel argument regarding “pattern” in ultimately granting the Defendants’ motions to dismiss.

Pattern of Racketeering Activity

The court dismissed a First Amended Complaint (FAC) finding that plaintiff did not adequately plead a pattern of racketeering.  Upon consideration of this FAC, and oral argument, the Court concluded that Metaxas adequately pled the predicate acts of mail and wire fraud.  Defendants asserted in argument that a predicate act under 18 U.S.C. § 664 could not be asserted for abstractions or thefts against a “SERP,” which is an unfunded plan described in ERISA.  However, the court indicated that Ms. Metaxas’s factual allegations and her recitation of out-of-circuit authority created some uncertainty about the mechanics of the SERP, the Court thus assumed, arguendo, that she stated a plausible claim of abstraction as a predicate act under RICO.*12.    

Assuming Ms. Metaxas had stated a plausible claim of two predicate acts, the question remained whether Ms. Metaxas adequately alleged a “pattern” of racketeering activity, as mandated by 18 U.S.C. § 1962(c).*12.  The court discussed that while duration is an important factor in determining whether closed-ended continuity is satisfied, the Ninth Circuit has described the “substantial period of time” requirement as a “flexible concept” and declined to adopt bright-line rules based on the temporal length of a scheme. See Allwaste, 65 F.3d at 1528. Courts also consider additional factors, such as the number of predicate acts, victims, and injuries, to assess whether the plaintiff has demonstrated closed-ended continuity. See Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1023-24 (7th Cir. 1992). Thus, according to the Court, when a plaintiff alleges only a single scheme with a single victim it cuts against a finding of both closed-ended as well as open-ended continuity. See Religious Tech. Ctr. v. Wollersheim, 971 F.2d 364, 365-67 (9th Cir. 1992) (emphasis added). Particularly in the context of open-ended continuity, a criminal scheme with a singular goal poses no threat of continuing criminal activity once that goal is achieved. Id.

Plaintiff alleged that the bank regulators were the principal victim of Defendants’ misrepresentations, while the Defendants contended that the regulators remained “merely inevitable players” in a circumscribed scheme ultimately focusing on Ms. Metaxas and her SERP benefits. The court discussed that even though the FAC sought to recharacterize the regulators as the primary targets of Defendants’ scheme, it remains the case that without the targeted abstraction of Ms. Metaxas’s SERP benefits none of the other predicate acts would have occurred (at least not in the manner alleged).*13.

The court concluded that the denial of her retirement benefits continues to supply the means for, and constitutes the but for cause of, Defendants’ other acts. The court stated that the additional instances of racketeering activity that Defendants purportedly committed are ancillary to what remains “a single scheme with a single victim,” as the Court previously held. *14.  In particular, while the FAC’s allegations of mail and wire fraud are more detailed than those in Ms. Metaxas’s original complaint, Defendants’ false reports to regulators continue to be—even in Ms. Metaxas’s own account—“the inevitable consequence, or at most cover-up”  of the scheme to deprive Ms. Metaxas of her SERP benefits. This conclusion is underscored by the highly contingent nature of Ms. Metaxas’s mail and wire fraud allegations, which, in order to succeed on the merits, would require a finding that Defendants did in fact wrongfully abstract her retirement benefits. The court stated that put another way, if Defendants were not actually liable to Ms. Metaxas under the SERP when they appropriated the retirement funds, then they did not commit fraud in reporting those funds as general assets in subsequent reports to the regulatory agencies.*14.   

The court also discussed that even if Defendants are eventually judged liable to Ms. Metaxas for the SERP payments, e.g., in the related ERISA action, then Defendants’ fraudulent reporting will presumably cease, with Ms. Metaxas receiving her previously withheld benefits. If Defendants were to prevail on the merits of the ERISA action there would be no fraud or abstraction.

Accordingly, the court concluded that Defendants’ conduct did not “amount to or pose a threat of continued criminal activity” as it did not establish open-ended continuity because, for the reasons just given, it does not “project[ ] into the future with a threat of repetition.”  It also does not establish closed-ended continuity because Defendants’ scheme targeted only one victim, Ms. Metaxas herself, with the regulatory agencies at most the merely incidental victims of the scheme. 

Ed. Note:   The view of this court that continuity may not be found when subsequent predicate acts spring from another preceding predicate act is a new and novel way for courts to find plaintiffs’ civil RICO claims inadequately pleaded.  There is no requirement in H.J. Inc. that different types of predicate acts must be alleged independent of each other, nor multiple victims. The requirement for independence between predicate acts for continuity purposes in fact directly conflicts with H.J. Inc.’s tests for finding “relationship” between predicates, i.e., the “criminal acts have the same purpose, results, participants, victims, or methods of commission.”  H.J. Inc. 492 U.S. at 240.   Under the court’s rationale, if “relatedness” is met a pattern can almost never be adequately alleged in a civil RICO case alleging fraud predicates.  This conflicts with the broad remedial purpose of the civil RICO statute as evidenced by legislative history and Supreme Court law. 

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

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

Facts:

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

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

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

Civil RICO Precepts

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

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

Enterprise

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

Racketeering Activity –  Rule 9(b)

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

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

Pattern of Racketeering Activity

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

Proximate Cause

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

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

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

Plaintiff Alleged a Prima Facie Civil RICO Claim and thus the Court granted Plaintiff’s Ex Parte Motion for Leave of Court to Serve Third-Party Subpoenas Duces Tecum Prior to the Service To Any Defendant

Cothran v. Abdul Koomson, 2020 WL 6450498 (E.D. Tex., Nov. 3, 2020)

Plaintiff alleged that Defendants conspired to lure Cothran into believing she was wiring funds to an individual romantic suitor when, in truth, she was wiring funds to the criminal enterprise. Cothran requests discovery from Capital One Bank and Bank of America to document and establish the allegedly fraudulent circumstances of the transfer of money to the Capital One Bank account, including the purpose of identifying unknown defendants who are anonymous Internet users.

Although the Federal Rules do not provide an exact standard for a court’s granting such authorization, the court stated that several other federal courts within the Fifth Circuit, including the Eastern District of Texas, have used a “good cause” standard to determine whether a party is entitled to early discovery.

In a good-cause analysis, the court weighs five factors: (1) whether the plaintiff has made a prima facie case of actionable harm; (2) the specificity of the discovery request; (3) the absence of alternative means to obtain the subpoenaed information; (4) whether there is a central need for the subpoenaed information to advance the claim; and (5) the user’s expectation of privacy.

Specifically, when “a party seeks a subpoena for identifying information of anonymous Internet users…‘the court must also balance the need for disclosure against the defendant’s expectation of privacy.’ ” Ensor, 2019 WL 4648486, at *2 (quoting Malibu Media, LLC v. Doe, SA-19-CV-00601, 2019 WL 3884159, at *1 (W.D. Tex. Aug. 16, 2019)). The court, when determining whether to authorize early discovery, enjoys “broad discretion to tailor discovery narrowly and to dictate the sequence of discovery.” 

Regarding Factor One, prima facie case, the Court concluded that Cothran demonstrated good cause has made a prima facie case of actionable harm and thus is entitled to limited early discovery for the purpose of identifying the unknown defendants. To establish a prima facie civil RICO claim, a plaintiff must allege: (1) a substantive predicate violation of 18 U.S.C. § 1962; (2) injury to his [or her] business or property; and (3) a causal connection between the racketeering activity and the injury.” 

The court found Cothran has alleged all three elements listed above. In particular, Cothran alleges that each of the individual Defendants is a “person” as defined in Section 1961(3) of RICO. Cothran further alleges that each of the individual Defendants conducted, participated in, or conspired to conduct or participate in a pattern of racketeering activity in connection with the defrauding enterprise’s conduct.  She claims that this enterprise is an “association in fact.”  Cothran alleges in detail how Defendants conspired to lure Cothran into believing she was wiring funds to an individual romantic suitor when, in truth, she was wiring funds to the criminal enterprise. She specifically alleges that Defendants engaged in a pattern of RICO predicate acts when they “repeatedly and systematically utilized wire fraud and bank fraud to defraud victims, divert the money to their own benefit, launder their proceeds,…and conceal the existence of their Enterprise.”  see 18 U.S.C. § 1961(1) (listing, among others, wire fraud and money laundering as RICO predicate acts). Cothran has therefore met the first prong of her prima facie RICO case.

Under the second prong of a prima facie Section 1962 violation, a civil RICO plaintiff must allege that he or she “suffered injuries ‘by reason of’ [the defendant’s violation of § 1962].” Ocean Energy II, Inc. v. Alexander & Alexander, Inc., 868 F.2d 740, 746 (5th Cir. 1989)(quoting 18 U.S.C. § 1964(c)). Cothran has alleged that, as a direct and proximate result of Defendants’ RICO violations, Cothran suffered extensive injuries, including damages of at least $153,943.32. Cothran has met the second prong of a prima facie showing.

For the third prong, a civil RICO plaintiff must assert his or her “right to sue” by pleading facts that demonstrate that the defendant’s violation of Section 1962 was both a “but-for” and “proximate” cause of his or her injuries. Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992). Cothran has alleged that her injuries were the “direct and proximate result” of Defendants’ RICO acts. Cothran has met the third prong of her prima facie case.

The court also found that the remaining factors [Factors 2-5] of the good-cause analysis were satisfied.

Court Denies Defendants’ Motion to Dismiss Civil RICO Claims Finding Standing, Statute of Limitations, Legal Entity Enterprise, and Predicate Acts Adequately Alleged

Uselman et al v. Pop et al., 2020 WL 6075553 (E.D. Mich., Oct. 15, 2020)

The court denied the defendants’ motion to dismiss RICO claims.   Plaintiffs were contractors who agreed to utilize its own equipment and vehicles to exclusively transport freight on behalf of the Carrier (Defendants).  The Agreement also provided that the “Carrier shall pay to Contractor a sum equal to 80 (%) percent of the gross revenues (after allowable deductions as provided herein) received by Carrier from Carrier’s customers for the transportation of any freight by Contractor.”  Once Plaintiffs transported the freight, the Defendants mailed Plaintiffs Driver/Contractor Settlement statements that purported to represent the gross revenue paid by the third-party shipper.  Plaintiffs allege that these statements were falsified because “Defendants would skim a portion” of the 80% amount and “misrepresent[ ] the gross revenues that RSP had actually received.”

Standing

Defendants argued under Rule 12(b)(1) that the held that a plaintiff lacked standing to sue in his individual capacity as his company’s creditor, sole shareholder, and chairman of the board. 

Plaintiffs’ claims in the instant case are identical to the purported injuries inflicted upon their companies, and that the named businesses were simply corporate extensions of the individual Plaintiffs that allowed them to enter into the relevant Agreements. Further, the Supreme Court has clarified that individuals may bring suit under the civil RICO statute if the predicate acts have caused injury to either their business or their property.  The court found that at this early dismissal stage, Plaintiffs have adequately demonstrated that Defendants’ alleged conduct injured the corporate entities and, by extension, the individual Plaintiffs. There is sufficient evidence to link the identities of the corporations and the individual Plaintiffs based on the supplied Agreement and the relevant case law. The Court therefore finds that Plaintiffs have met the constitutional minimum to establish standing, and the Complaint would not be dismissed for lack of subject matter jurisdiction under Rule 12(b)(1).

Statute of Limitations

Plaintiffs alleged that Defendants acted to conceal all of Plaintiffs’ claims by failing to disclose the true amounts the third-party shippers paid to the Defendants. The court stated that if true, these misrepresentations prevented Plaintiffs from knowing, or even suspecting, that they were not receiving their owed compensation under the Agreements for many years. Plaintiffs state that it was not until “April or May 2018” that they suspected any wrongdoing by Defendants and if true,  Plaintiffs claims were properly pled within the statute of limitations under both the RICO injury discovery rule and the state fraudulent concealment rule.  This Court thus found that a factual dispute exists as to the onset date of the applicable statues of limitations and whether Plaintiffs acted reasonably and diligently to investigate any suspicions of wrongdoing before 2018.*5. 

Legal Entity Enterprises

Plaintiffs argued that each of the four named Defendants are legally distinct entities, satisfying the pleading requirement at this stage.  Plaintiffs here have alleged, at the very least, that (1) RSP Express’ registration as a motor carrier and (2) NA Truck Repair’s license to work on vehicles are distinct elements that separate them from Razvan and Maria Pop.  Plaintiffs further argued that Defendants Razvan Pop and Maria Pop engaged in fraudulent behavior, while the corporate entities (RSP Express and NA Truck Repair) “performed distinct roles that helped facilitate the fraudulent scheme.”  The Court discussed that the unique registrations of the corporate entities provided the individual Defendants with a means to carry out the alleged fraud. The court compared the facts to Begala, 214 F.3d at 782 (finding that the plaintiff’s complaint did not “contain facts suggesting that the behavior of the listed entities is ‘coordinated’ in such a way that they function as a ‘continuing unit.’ ”).

Note:   The court is looking at multiple legal entities to see whether they “function as a continuing unit,” a test for association in fact enterprise.  Merely, each legal entity is itself a distinct enterprise from each individual defendant, but distinctness from each corporate defendant was also found under the association in fact argument. 

Predicate Mail Fraud Acts

Plaintiffs’ claim that Defendants mailed thousands of statements that fraudulently concealed their obligation to pay Plaintiffs a certain sum in accordance with their Agreements. This system, Plaintiffs aver, allowed Defendants to unlawfully withhold funds that were otherwise owed to the owner-operators.  The court stated that other circuits have interpreted the mail fraud statute to find that a defendant may be criminally liable for fraudulently underreporting payment obligations via mailings.  Therefore, Plaintiffs have sufficiently demonstrated that the facts contained in Count I constitute RICO predicate acts.

The court noted for Count II (RICO conspiracy) Plaintiffs are attempting to use violations of state anti-tampering laws, which are misdemeanors and do not qualify as “racketeering activity,” as the Defendants’ predicate RICO offense, and the Plaintiff were granted leave to amend on this point. Accordingly, the motion to deny was denied on this Count without prejudice.

Editor Note:   It is advisable as a matter of practice to not include legal entities as defendants when also alleging them as parts of enterprises, but it is certainly possible, as evidenced by this court’s decision. 

Oral Argument in Zamora v. JP Morgan Chase, Second Circuit, No. 19-cv-2108

On October 29, 2020, David J. Stander represented plaintiff Zamora in a video oral argument before the Second Circuit Court of Appeals. Mr. Stander argued that the lower court erred in not finding a RICO enterprise sufficiently alleged. Mr. Stander argued that that the members and associates of the Enterprise, consisting of the Bank and certain defaulting defendants, functioned together with a ‘common purpose’ given the allegations that the Bank knew, or must have known, of the illicit activity by the defaulting defendants.

Pls. contact Mr. Stander at (240) 643-2723 if you have any questions.

Sixth Circuit Reverses District Court Order Certifying A ‘Negotiation Class’ in this Civil RICO Opiate Litigation; Dissenting Judge Expounds Upon Supreme Court’s View that Individual Reliance is Not Required in Civil RICO Fraud Litigation and thus ‘Predominance Requirement” Would Be Satisfied

In re National Prescription Opiate Litigation, __ F.3d ___, 2020 WL 5701916 (6th Cir., Sept. 24, 2000)

In this multi-district litigation (“MDL”) relating to the opioid crisis, the Court addressed the district court’s order certifying a “negotiation class” under Federal Rule of Civil Procedure 23. The district court had certified a class of all cities and counties throughout the United States for purposes of negotiating a settlement between class members and opioid manufacturers, distributors, and pharmacies.  Appellants, objecting opioid distributors and retail pharmacies (“Defendants”), as well as six objecting Ohio cities, appeal the district court’s order certifying this negotiation class. Appellees, putative representatives of the negotiation class (“Plaintiffs”), requested the court to approve this novel form of class action, but the Court declined to do so for various reasons discussed in the opinion.   Accordingly, the court reversed the district court’s order.

Dissent:  

Further argument in support of certifying the “negotiation class” was the dissenting Judge’s opinion who that RICO’s causation element did not necessitate individualized proof and thus the predominance criterion of Rule 23 was satisfied.  In other contexts, whether harm was caused by individuals’ reliance on alleged fraud may be an individual question that would predominate over common questions. But, the Judge said “Not so for RICO.”

The Judge stated that Defendants’ argument is at odds with both the Supreme Court’s and Sixth Circuit precedent. In Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 128 S.Ct. 2131, 170 L.Ed.2d 1012 (2008), the Supreme Court held that those who bring mail fraud claims under RICO do not have to demonstrate that they relied on the fraud to establish that their injuries were caused by the fraud. See id. at 649, 128 S.Ct. 2131 (“[N]o showing of reliance is required to establish that a person has violated § 1962(c) by conducting the affairs of an enterprise through a pattern of racketeering activity consisting of acts of mail fraud.”). Because “[f]or RICO purposes, reliance and proximate cause remain distinct,” Plaintiffs “need only show use of the mail in furtherance of a scheme to defraud and an injury proximately caused by that scheme.” Wallace v. Midwest Fin. & Mortg. Servs., Inc. 714 F.3d 414, 420 (6th Cir. 2013). RICO’s softened causation element “largely dooms the Defendants’ attempt to identify individual issues of causation sufficient to preclude a finding of predominance.” Torres v. S.G.E. Mgmt., L.L.C., 838 F.3d 629, 638 (5th Cir. 2016)see, e.g.id. at 638–40 (finding predominance existed when pyramid scheme victims sought to certify RICO claims because victims’ being “necessary to the scheme[,]” “direct victims of the scheme,” and “foreseeable victims of the alleged fraud” satisfied RICO’s causation element).

Note:   This affirmation by the dissenting Judge of the broad reach of civil RICO fraud actions, particularly in Class Action cases, is worthy of examination. 

Tenth Circuit Upholds Civil RICO Violations in Class Action; Court Finds “Distinctness” Even if Legal Entity Enterprises are “Sham” and “Alter Egos” of Individual Defendant

CGC Holding Company LLC v. Hutchens, __ F.3d ___, 2020 WL 5509695 (10th Cir. 2020)

The court upheld the civil RICO allegations against the defendants in this class action.   The Class had alleged that Hutchenses had engaged in wire fraud by using “wire transfers, e-mail, telephone, Internet, and facsimiles” to defraud the class members of their advance fees paid for loan monies which were never provided.

The court reiterated the plain language of RICO defines racketeering far more broadly in a way that allows the statute to “reach both legitimate and illegitimate” businesses. Id. at 499, 105 S.Ct. 3275(internal quotation marks omitted).

The Hutchenses first argued that the class presented no evidence that Tanya Hutchens, the wife of the principal wrongdoer Sandy Hutchens, violated § 1962(c)and § 1962(d).  The Court disagreed stating even though Tanya’s involvement was not as clear cut the class’s evidence showed that Tanya had participated in the operation or management of the enterprise in a supporting role and sufficiently connected her to Sandy’s plans. “A conspiratorial agreement … need not be express so long as its existence can plausibly be inferred from the defendant[’s] words and actions and the interdependence of activities and persons involved.” *6 citing cases. Here, the court found a plausible inference that Tanya participated in the conspiratorial agreement.  The court stated that just because Tanya played a supporting role does not relieve her of responsibility for her involvement in the scam. Salinas v. United States, 522 U.S. 52, 64 (1997). “[S]upporters are as guilty as the perpetrators.” Id. 

The Hutchenses next argued that the class failed to satisfy RICO’s distinctness requirements claiming that the issuing companies, which were legal entities, were mere alter-egos and destroyed the person/enterprise distinction that RICO requires.  The Court rejected the Hutchenses’ argument as contrary to RICO’s basic purpose. The Supreme Court has stated that RICO “protects the public from those who would unlawfully use an ‘enterprise’ (whether legitimate or illegitimate) as a ‘vehicle’ through which ‘unlawful … activity is committed.’ ” Id. at 164, 121 S.Ct. 2087 (quoting Nat’l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 259, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994)). And the Court has acknowledged that the “corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status.” Id. at 158, 121 S.Ct. 2087. Thus, RICO “requires no more than the formal legal distinction between ‘person’ and ‘enterprise’ (namely, incorporation),” which is present here. Id. at 165, 121 S.Ct. 2087.

Thus, the Court found the issuing entities were distinct—i.e., corporations with its own legal existence. We find “nothing in RICO that requires more ‘separateness’ than that.” Id. at 158, 121 S.Ct. 2087. The Hutchenses’ position would allow an individual—like Sandy—to avoid RICO liability by using shell companies to conduct criminal enterprises. And while using shell companies as shams to perpetuate frauds might eliminate any separateness between the wrongdoer and his shell corporation in the business corporations context (i.e., through veil piercing), it does not destroy the separateness that RICO requires. Such a position would undermine RICO’s purpose of protecting “the public from those who would unlawfully use an ‘enterprise’ (whether legitimate or illegitimate)” to commit unlawful activity. Id. at 164, 121 S.Ct. 2087.  The court thus rejected the Hutchenses’ argument that the class’s alter-ego allegations destroyed any separateness between Sandy and the issuing entities under RICO.

The Hutchenses challenge of lack of causation failed finding the class members would not have applied for the loans in the first place had they known Sandy was a career criminal and that the issuing entities could not fund the loan commitments.  Thus, the Hutchenses fraudulently induced the class members to enter into loan commitments and the Hutchenses’ misrepresentations directly caused the class to suffer monetary damages.

Ed Note:   The Court follows the principle of Cedric Kushner in finding “distinctness” even when the legal entities are shams and alter-egos of the individual RICO defendant.  The Court’s argument in support of its finding is instructive.

Ninth Circuit Explains Civil RICO Statute of Limitations, Including the Separate Accrual Rule and Equitable Tolling

Noland v. Chua and Moran, 2020 WL 4718074 (9th Cir. Aug. 13, 2020)

The court affirmed the denial of plaintiff’s appeal of a judgement entered in favor of defendants on his RICO claim.  Noland’s first amended complaint established that, under the injury-discovery rule, the four-year civil RICO limitations period began to run in 2009 when Noland received a letter informing him that his partnership interests, including the right to ongoing payments and fees, had been terminated, and his status had been reduced to that of former distributor. *1, citing Pincay v. Andrews, 238 F.3d 1106, 1109–10 (9th Cir. 2001) (holding that receipt of a written disclosure of one’s purported injury constitutes constructive notice sufficient to start the limitations period running).

Therefore, because the RICO claim was not filed until 2018, it was time-barred.  The court considered whether the first amended complaint alleged facts constituting new and independent acts sufficient to restart the limitations period.  If so, the separate accrual rule could restart the civil RICO limitations period.   Two elements must be established for an overt act to restart the period of limitations:

“1) It must be a new and independent act that is not merely a reaffirmation of a previous act; and 2) it must inflict new and accumulating injury on the plaintiff.”

The Court decided that the activity alleged in Noland’s first amended complaint merely reaffirmed the initial act to exclude Noland from the business. In any event, according to the pleadings, Defendants’ offshore transfer activities were completed in or before 2012, meaning that Noland had only until 2016 to file a RICO claim. Because he waited until July 2018 to file, Noland’s RICO claims were time-barred.

The Court also considered whether the limitations period was equitably tolled by the filing of a parallel action in Canada and found because the Canadian action demonstrated Noland’s awareness of his asserted legal injury, Noland was not prevented from filing this action pending resolution of the Canadian case.  The court stated that to allow tolling here would encourage delayed RICO filings and piecemeal litigation across multiple jurisdictions. *1.

The court also found that tolling on grounds of fraudulent concealment was not available to Noland. The limitations period does not toll simply because Noland was ignorant of Defendants’ alleged offshore activity. “The doctrine of fraudulent concealment is invoked only if the plaintiff both pleads and proves that the defendant actively misled [him], and that [ ]he had neither actual nor constructive knowledge of the facts constituting [his] cause of action despite [his] due diligence.” *2, citing Grimmett, 75 F.3d 506 (9th Cir. 1996) , and this test was not met.

Note:  In Grimmett, supra, the plaintiff argued that defendants actively concealed their racketeering activity by perjuring themselves in depositions to hide their pattern of conduct. Id. at 514. The court found that defendants’ failure to “own up” to the illegal conduct does not constitute fraudulent concealment because plaintiff was aware of the facts that led to the claim.

 

 

Third Circuit Relies on Bridge and Holmes Factors to Reverse Lower Court Dismissal of a Civil RICO Action Which Had Found Inadequate Proximate Causation

St. Luke’s Health Network Inc. v. Lancaster General Hospital, __ F.3d __, 2020 WL 4197525 (3rd Cir. 2020)

The Court found the Plaintiffs’ theory of liability adequately alleged proximate causation and thus reversed the District Court’s dismissal, and thus remanded for further proceedings consistent with this opinion.

This case involves a state-run program to reimburse Pennsylvania hospitals for treating indigent patients. Plaintiffs-Appellants are a group of hospitals and their related health care networks that sought civil remedies from Defendants-Appellees, another hospital and hospital system, for “RICO” violations. Plaintiffs alleged that Defendants submitted fraudulent claims for reimbursement, in violation of the wire fraud statute, 18 U.S.C. § 1343, and received an unduly inflated proportion of the available funding. As a result, Plaintiffs claim they were reimbursed an artificially smaller share of funds. The District Court found that Plaintiffs failed to plead sufficient facts to demonstrate that their injury was caused by Defendants’ alleged fraud.

Specifically, Plaintiffs alleged that employees of Lancaster, “knew that [Lancaster’s] claims were grossly inflated but nevertheless continued to submit them even after being called out by the Auditor General.”  These actions were alleged to result in “massively inflated extraordinary expense claims,” which unjustly enriched Lancaster by $9 million during Fiscal Years 2010-2012. Since participating hospitals submitted claims that totaled more than was available in EE Program funding for Fiscal Years 2010-2012, Plaintiffs claim they were collectively undercompensated by $9 million during those years.

The Court discussed that in the RICO context, the focus [of proximate causation] is on the directness of the relationship between the conduct and the harm” rather than “the concept of foreseeability.” Hemi Grp., 559 U.S. at 12, 130 S.Ct. 983 (2010).   The court discussed that the allegations pertinent to the question of proximate cause are those of the purported injury.*4.

The court discussed that Plaintiffs’ theory of liability and alleged injury in the present case are nearly identical to that of the Bridge plaintiffs.  Because the EE Program has a fixed pool of assets, Defendants’ alleged manipulation to increase their share of the limited funding necessarily resulted in Plaintiffs receiving a decreased proportion of those assets.*5.  Moreover, Plaintiffs’ theory of proximate cause satisfies the Supreme Court’s three policy considerations for directness of injury. See Holmes, 503 U.S. at 269–70, 112 S.Ct. 1311.

Given that Plaintiffs have adequately alleged proximate causation, and because the Court did not find no “independent factors that account[ed] for [the plaintiffs’] injury … and no more immediate victim [was] better situated to sue,” the Court reversed the District Court. *6.

 

 

Court Affirms Dismissal of Civil RICO Claim Finding, Among Other Things, Inadequate Pleading of Proximate Cause

Collier v. LoGuidance, ___ Fed. Appx. ___, 2020 WL 3485704 (6th Cir. 2020)

The court affirmed the lower court decision dismissing a ‘wage theft scheme’ because it sought the same remedy provided by the FLSA, the recovery of unpaid overtime.  The court also affirmed the lower court decision that Collier did not adequately allege proximate cause with regard to the remaining two schemes (tax evasion and workers’ compensation insurance).

Regarding the first scheme, the district court did not address the preclusion argument and dismissed Collier’s RICO claims on different grounds. However, the court found that it could “affirm on any grounds supported by the record even if different from the reasons of the district court.’ at *3, citing cases. Therefore, like the Court in a previous case, i.e., Torres, the court affirmed the dismissal of Collier’s RICO claim as it relates to the ‘wage theft scheme’ because it sought the same remedy provided by the FLSA, i.e., the recovery of unpaid overtime.

Regarding the ‘tax evasion’ and ‘workers’ compensation insurance scheme,’ the dismissal of these  allegations were based on lack of proximate cause.  The court discussed that the central question” for purposes of proximate causation under RICO “is whether the alleged violation led directly to the plaintiff’s injuries.” at *3 citing to Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006) (emphasis added); see also Hemi Grp., LLC v. City of New York, 559 U.S. 1, 9–10, 130 S.Ct. 983, 175 L.Ed.2d 943 (2010) (plurality opinion) (explaining that RICO requires a “direct relationship” between the fraud and the injury).

Here, the court found that Collier did not sufficiently plead proximate cause as it relates to either the ‘Workers’ Compensation Insurance Scheme’ or the ‘Tax Evasion Scheme.’ As to the first scheme, Appellees conduct injured the employer’s insurance company, but Collier did not allege any facts which showed how she was injured by this scheme. Therefore, the district court properly dismissed Collier’s RICO claim to the extent that it relies on the alleged Workers’ Compensation Insurance Scheme.

As to the Tax Evasion Scheme, Collier alleges that Appellees did not pay the required amount of withholdings to tax authorities, which she argues injured her by lowering her future social security benefits and exposing her to tax liabilities and penalties.  The court found that the defendants’ misconduct (mailing false W-2s) did not lead directly to Collier’s injuries.  As in Hemi Group, “the conduct directly responsible for [Collier’s] harm was [her own] failure to pay [her] taxes,” not the defendants’ failure to report her cash wages. Hemi Grp., 559 U.S. at 11, 130 S.Ct. 983. Although most employees inherently rely upon the figures reported on their W-2s as accurate, when Collier filed her taxes she knew she received off-the-books cash payments for certain hours and knew her pay statements and W-2 statements did not include these off-the-books cash payments and she chose not to pay taxes on them. Therefore, the alleged violation of mailing false W-2s did not lead directly to Collier’s injuries.