This аppeal arises out of a RICO class action suit that the district judge dismissed without deciding whether to certify it as a class action. The appeal is from the judge’s denial of the defendants’ application for an award of their attorneys’ fees under Fed.R.Civ.P. 11.
The principal defendant, B & B Enterprises, is a residential real estate developer, mostly of high-end custom-home subdivisions. Active in Wasco, a community in northeastern Illinois, in 1994 B & B (actually a company controlled by it but we can ignore that detail) received from the Was-co Sanitary District permits to connect to the district’s sewage system almost 800 houses and other buildings that B & B and other developers were building in a subdivision called Fox Mill. (Some allegations concern other subdivisiоns in the same general area, but, again to simplify the opinion, we’ll refer to all the subdivisions as Fox Mill.) In 2010 plaintiff Fiala, the owner of a home in Fox Mill, joined by Tim Kobler Custom Houses, a homebuilder, brought this suit charging that B & B
The alleged scheme involved what are called “Population Equivalents” (“PEs”)— specified quantities of sewage (generally 100 gallons per day) that a house or other building (this case is just about houses, however) is estimated to dump into the local sewage system. 225 ILCS 225/3(6); 35 111. Admin. Code § 301.345. The more PEs that a house connected to the system produces, the larger and so more costly the system must be to handle all the wastewater discharged into it, and therefore the higher the fee that the sanitary district would be apt to charge fоr a permit to connect the house to the district’s sewage system. The fee is charged to the builder and thus becomes one of the costs that he tries to recoup in the price that he charges for the house.
The Wasco Sanitary District decided to allot 3.5 PEs to each house that would be built in its district because that is the allotment that the state recommends, though does not require, for single-family houses. 35 111. Admin. Code § 370, Appendix A.
The complaint alleges that B & B had, mainly through family connections, improperly taken control of the Wasco Sanitary District and used that control to divert to itself permit fees that should have gone to the district to finance an expansion of its sewage system. As Fox Mill expanded, the number of PEs that the sanitаry district could grant without having to expand its sewer system ran out; the system was surfeited. B & B, the suit charged, decided — so that it could continue the expansion of Fox Mill — to “steal” PEs from existing homes and sell the stolen PEs to builders, like Kobler. The “stolen” PEs would enable the builder to obtain a sewage permit for the buyer of each of the houses he built.
Why was B & B (allegedly) doing this?
Suppose a sewаge treatment facility can process up to 20,000 gallons of wastewater a day — equivalent to 200 PEs. A sanitary district that followed Illinois’s recommendation to allot 3.5 PEs to every single-family house would therefore allow only 57 houses to be connected to the sanitary district’s sewage system. But 3.5 PEs per house is only an estimate of average wastewatеr discharge. Those 57 houses might generate more, or fewer, than 20,-000 gallons of wastewater per day — fewer if 3.5 PEs per house is a con servative estimate of the amount of wastewater discharged by the average single-family house. And probably it is, since if it were an underestimate the sewage treatment facility would be inadequate.
B & B took advantage of the assumed conservative bias in the estimate to allocate only 2.5 PEs per house. But the plaintiff alleges that in order to obtain the required permits for a residential development B & B represented to the sanitary district that it was allocating 3.5 PEs to each house. This ■ deceit would, in our example, allow B & B to build 80 rather than 57 houses without neсessarily straining the sewage treatment facility — if indeed the average wastewater production per house is only 2.5 PEs. The sanitary district would permit the fraud because it was controlled by B & B, and as long as the sewage treatment facility was not strained, the fraud, though creating a risk of harm, would impose no actual harm on the development. Committing the frаud was made easier by a long-standing contract between B & B and the sanitary
B & B’s alleged wresting of control of the sanitary district and use of that control to divert to itself fees that should have gone to the district to finance any needed expansion or improvement of the sewage system is the sort of conduct that could if proved violate RICO. See, e.g., H.J. Inc. v. Northwestern Bell Telephone Co.,
The district judge said that “Fiala’s PEs are not property and cannot have been taken or stolen from him. The sup posed theft therefore doеs not provide a basis for RICO standing.” He was right. A PE is just a measurement unit used to estimate the amount of wastewater that a single-family house is likely to discharge — an estimate for use by the sanitary district in sizing its wastewater treatment facility (for example to comply with environmental regulations, see, e.g., 35 111. Admin. Code § 304.120(b)) and in pricing sewage permits accordingly. A PE is not a right to discharge a given amount of wastewater. To treat it as a right would have the' absurd consequence that if the district or state agency decided that 3.5 PEs was too conservative an estimate of the amount of wastewater likely to be used by the average single-family home and reduced the allotment to 3 PEs, the homeowner could complain that a portion of his property had been taken for a public use, entitling him to compensation under the Fifth Amendment’s just-compensation clause, though in fact he’d sustained no loss.
It would be different if by reducing Fia-la’s allotment of PEs the sanitary district reduced the amount of waste that he could discharge into the district’s sewage system. For then he might have to install а septic tank (if that were permitted), or limit the use of his kitchen and bathrooms, in order to reduce his wastewater discharge — and those would be costs. But, to repeat, the allotment of PEs to a house is not a limit on how much wastewater it can discharge into the sewage system. The fee for a sewage permit is not a fee per PE. The permit entitlеs you to discharge any amount of wastewater.
So PEs aren’t rights; but whether they are or not actually is irrelevant. RICO doesn’t require a plaintiff to prove that his property or business was taken; all that’s required is an injury to property or to business. In Fiala’s case it would
Fiala could have been injured indirectly by the scheme if it deprived the sanitary district of fees that could have been used to expand or improve its sewage system or meet other public needs that would benefit Fiala. For the deprivation might have degraded the system, resulting in a backup of wastewater into homes, or have caused the sanitary district to increase taxes to make up for the lost fees. But these possibilities, though alluded to in the plaintiffs briefs, are not claimed to be a source of compensable injury to members of the class. And any injury to the sanitary district itself is irrelevant to this case, because the district is neither a plaintiff nor a class member — it’s a defendant, alleged to be an accomplice of B & B in the scheme to steal and resell PEs.
Yet the district judge surprisingly remarked that the sanitary district was the direct victim of the alleged scheme, that it had been included in the litigation only as a “nominal” defendant, and that the “indirect purchaser” doctrine of antitrust law, which forbids a purchaser from the victim of cartel pricing to sue the cartelists even when the immediate victim had passed on some or for thаt matter all of the cartel’s price increase to its customers (the indirect purchasers), Illinois Brick Co. v. Illinois,
But we don’t understand why the sanitary district — B & B’s alleged accomplice — should be thought merely a “nominal” defendant. The indirect-victim doctrine (as the indirect-purchaser doctrine should be called when there’s no purchaser) does not bar a suit against an accomplice. No matter; the plaintiff has not challenged the district judge’s indirect-victim ruling. Nor has he presented any evidence of any injury to himself or to the class members.
So the district judge was right to dismiss the RICO claim — and the plaintiff has not appealed the dismissal. It’s the defеndants who have appealed, complaining—
The defendants have missed the boat — they have failed to engage the district judge’s grounds for denying the motion. On whether the suit was frivolous or had been brought for an improper purpose, the judge said that the plaintiffs’ theory (оn which the suit pivoted, given RICO’s requirement that the plaintiff show an injury to business or property) that PEs were property “was wrong ... but I don’t think it was so wrong as to be sanetionable.... Referring to PEs as property ... was part of the vernacular. The district’s commissioners thought that PE was property.... PEs were apparently treated as though they could be bought and sold.” And so the рlaintiffs’ suit, while meritless, was not frivolous. As for its having been brought for an “improper purpose,” “certainly, it is not improper to file a non-frivolous claim in the hope of getting paid.” Vollmer v. Selden,
More troubling is the judge’s ground for rejecting the defendants’ argument that the plaintiffs had failed to conduct an adequate pre-complaint investigation, as required by Fed.R.Civ.P. 11(b)(3), (4). The plаintiffs complaint contained supplemental state law claims for fraud and conspiracy, claims that rested on the same facts as the main claim, the RICO claim. When the judge dismissed that claim, he relinquished supplemental jurisdiction over the state-law claims and remanded them to state court, where they are pending. Having done so he denied thе Rule 11 motion on the ground that if he imposed sanctions for “objectively groundless factual allegations of fraud and lying and conspiracy and theft and it turns out that Mr. Fiala prevails in state court[,] I’d look kind of foolish for jumping the gun, and I’d be stepping on the toes of the state court judge, and I don’t think it’s appropriate to do that.” That was not a sound reason for denying the defendants’ motion, for no basis is suggested for a state court’s having jurisdiction to impose sanctions for misconduct committed in a federal proceeding.
What the district judge should have done, given his uncertainty about the merits of the motion and his belief that the state court litigation might cast light on those merits, was to stay action on the motion pending findings in thе state case that might undermine or bolster it. That might seem inconsistent with Rule ll’s focus on the pre-complaint investigation. But the question of the adequacy of that investigation (which we address next) is different from whether the suit was brought for an improper purpose, or was frivolous. Whether the factual allegations turn out to be true is relevant to that question. A complaint might be filed with no pre-complaint investigation whatsoever; but if the purpose was not improper and all the alleged facts turned out to be true and the plaintiff prevailed in the suit, there would be no basis for imposing sanctions. So the judge wasn’t wrong to think that state court findings could affect the merits of the Rule 11 motion, and therefore he could have waited to rule on the motion, though he should not have denied it outright.
In the section of their brief that precedes the argument portion and is captioned “The District Court’s Ruling,” the
But this bobble by the defendants turns out not to matter, because they have never made a persuasive case that the precomplaint investigation had been inadequate. Class counsel claims without contradiction to have devoted 170 hours to factual and legal research before filing the suit. The fact that the research turned up negligible evidence of injury to class members does nоt imply an inadequate investigation, but merely a weak case. The builder Kobler may have been injured by having to fork over $150,000 to B & B to receive PE allotments that he needed in order to be able to obtain sewage permits, which he needed in order to be able to build salable houses in Fox Mill. He testified that of course the fees were costs to him and that he tries to recoup his entire cоsts in the price he charges for building a house, but he was unclear whether he always succeeds in recouping the fees. And though he agreed with the defendants’ lawyer at a couple of places in his deposition that he had recouped them, it’s unclear whether he understood the questions that elicited that response. If the fees were highеr than what the sanitary district itself would have charged for permits, he may have been hurt — anything that increases a seller’s costs is likely to reduce his profits. For the tendency of an increase in price is to reduce buyer demand, and the likelihood of such a reduction may cause a seller to trim his price at some sacrifice in profit to avoid losing customers. Kobler may have thought that he had recouped the PE fees that he had paid B & B but not some other cost. But maybe he hadn’t been able to recoup the other cost because he he could not raise his price sufficiently to cover both it and the PE fees; in that event any increase in those fees attributable to the allеged RICO violation would have hurt him, albeit indirectly.
The complaint also alleged that B & B’s scheme “endangered] the health and welfare of the plaintiffs and the citizens within the [sanitary district] and Illinois.” For both the Illinois Environmental Protection Agency and the Illinois attorney general notified the Wasco Sanitary District that it was violating federal and state pollution regulations, and conceivably that was because the district had been denied by the plaintiffs’ fraud the resources it needed to make its sewage system comply with those regulations. There’s no evidence to support that conjecture, however, and even if there were it would establish merely a personal injury, which is not compensable under RICO. Evans v. City of Chicago,
But all this is to one side of the alleged inadequacy of the pre-complaint investigation, which the defendants failed to substantiate.
The district judge’s denial of the Rule 11 motion, though based in part on an erroneous (but harmlessly so) ground, must be
Affirmed.