Yucaipa American Alliance Fund v. Richard Ehrlich
16-3664
| 3rd Cir. | Nov 15, 2017Background
- Allied emerged from a 2007 bankruptcy with Yucaipa as majority equity holder; Allied incurred $265M in first-lien debt held by many lenders, including BD/S (Black Diamond and Spectrum).
- The credit agreement barred Yucaipa (as majority equity holder) from acting as the “requisite lenders” unless unanimous consent amended the agreement; Yucaipa later attempted to acquire ComVest’s first-lien claims and to remove those restrictions.
- BD/S disputed Yucaipa’s claim to be requisite lenders; New York state and Delaware bankruptcy courts found BD/S were the requisite lenders, and BD/S sponsored an approved reorganization plan in the Delaware bankruptcy that sought equitable subordination of Yucaipa’s first-lien claims.
- Yucaipa sued BD/S in federal court asserting RICO (18 U.S.C. § 1962) claims based on alleged predicate acts (false statements in bankruptcy filings, claims trading, obstruction, wire/mail fraud) and state-law fraud and tortious interference claims; Yucaipa sought damages including loss in value of its first-lien claims and attorneys’ fees.
- The District Court dismissed Yucaipa’s RICO claims for lack of RICO standing and for failure to plead a pattern/closed-ended continuity, and declined supplemental jurisdiction over the state claims; Yucaipa appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| RICO standing (injury to business or property) | Yucaipa: loss in value of first-lien claims from equitable subordination and attorneys’ fees constitute concrete RICO injuries | BD/S: injuries are speculative/contingent on unresolved bankruptcy outcomes; fees may be recoverable but are contingent | Held: No RICO standing — alleged injuries are contingent on ongoing bankruptcy and related litigation, so not sufficiently concrete |
| Pattern of racketeering (closed-ended continuity) | Yucaipa: scheme began in 2009; continuity should be measured by underlying scheme, not just RICO predicate dates | BD/S: predicate acts alleged span only ~9 months (Sep 2011–May 2012), insufficient for closed-ended continuity | Held: Failed to plead closed-ended continuity; only ~9 months of predicate acts alleged, not a "substantial period" |
| Use of pre-predicate communications to extend continuity (Tabas argument) | Yucaipa: early non-predicate communications (2009 emails) are part of the underlying scheme and should be included in continuity | BD/S: 2009 communications were not predicate acts and did not further the later alleged RICO predicates; Tabas does not extend that far | Held: Court rejects extending Tabas — pre-predicate conduct that is not itself fraudulent cannot be folded into continuity here |
| Attorneys’ fees as RICO injury | Yucaipa: attorneys’ fees incurred because of the alleged scheme qualify as RICO injury | BD/S: fees are contingent and recoverable in bankruptcy or other litigation, so not a concrete RICO injury here | Held: Court did not decide categorically whether fees can be RICO injury but held fees alleged here are contingent and do not establish standing |
Key Cases Cited
- Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir. 2000) (RICO injury requires actual monetary loss; contingent future harms insufficient)
- H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (U.S. 1989) (pattern requires continuity; closed- and open-ended concepts explained)
- Hughes v. Consol-Pennsylvania Coal Co., 945 F.2d 594 (3d Cir. 1991) (12 months between predicates is not a substantial period for closed-ended continuity)
- Tabas v. Tabas, 47 F.3d 1280 (3d Cir. 1995) (in mail-fraud cases, examine the underlying scheme when assessing continuity)
- Hindes v. Castle, 937 F.2d 868 (3d Cir. 1991) (continuity and duration analysis for RICO predicates)
- In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010) (standard of review: plenary for Rule 12(b)(6) dismissal)
- Handeen v. Lemaire, 112 F.3d 1339 (8th Cir. 1997) (recognizing attorneys’ fees as RICO injury in some contexts)
- Bankers Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir. 1988) (recognizing attorneys’ fees as RICO injury in certain circumstances)