KEHR PACKAGES, INC., Charles and Emily McMurtrie, and James
McMurtrie, Appellants,
v.
FIDELCOR, INC., Fidelity Bank, Thomas Donnelly, Neil Cohen,
James Noon, and Mario Giannini, Esq.
No. 90-1396.
United States Court of Appeals,
Third Circuit.
Argued Nov. 6, 1990.
Decided March 6, 1991.
Rehearing and Rehearing In Banc
Denied March 27, 1991.
Joel H. Slomsky (argued), DiGiacomo & Slomsky, Philadelphia, Pa., for appellants.
Walter Weir, Jr. (argued), Patterson & Weir, Philadelphia, Pa., for appellees.
Before SLOVITER, Chief Judge* SCIRICA and ALITO, Circuit Judges.
OPINION OF THE COURT
SCIRICA, Circuit Judge.
This case requires us once again to address the question of what constitutes a "pattern of racketeering activity" under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. Secs. 1961-68 (1984 & Supp.1990). The district court held that plaintiffs did not sufficiently allege such a pattern. We will affirm.
Plaintiffs Kehr Packages, Inc. ("Kehr"), James McMurtrie, Charles McMurtrie, and Emily McMurtrie filed suit against Fidelcor, Inc., Fidelity Bank, N.A. ("Fidelity"), Thomas Donnelly, Neil Cohen, James Noon, and Mario Giannini. The complaint contained both RICO and pendent state law claims arising from an allegedly fraudulent promise to lend money to Kehr. The substantive grounds for the RICO claims were allegations of mail fraud in violation of 18 U.S.C. Sec. 1341. The district court permitted defendants to conduct discovery to determine whether subject matter jurisdiction existed.
Following discovery, defendants filed a motion to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1), and a motion for summary judgment. Plaintiffs opposed the motions and filed their own motion for leave to file an amended complaint. The district court granted defendants' motion to dismiss and denied plaintiffs' motion for leave to amend. The court held that plaintiffs had not sufficiently alleged mail fraud, and assuming they had alleged such fraud, the allegations in the complaint did not constitute a "pattern" under RICO. The district court denied plaintiffs' motion for leave to amend on the grounds that the proposed amended complaint would not cure the defects in the original. Plaintiffs now appeal from these rulings.
I. STANDARD AND SCOPE OF REVIEW
Initially, we must decide what legal standard should govern this appeal. Defendants filed a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1). The district court granted this motion because it found the RICO claims in plaintiffs' complaints to be legally insufficient. Thus, although the court denominated its order as one under Rule 12(b)(1), it appeared to dismiss the complaint under Rule 12(b)(6) for failure to state a claim upon which relief could be granted.
The legal standards governing these two motions are different. A district court can grant a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction based on the legal insufficiency of a claim. But dismissal is proper only when the claim "clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or ... is wholly insubstantial and frivolous." Bell v. Hood,
In this case, we believe the district court's order should properly have been denominated a dismissal under Rule 12(b)(6), and we will treat it as such. See Black v. Payne,
A plaintiff may be prejudiced if what is, in essence, a Rule 12(b)(6) challenge to the complaint is treated as a Rule 12(b)(1) motion. When subject matter jurisdiction is challenged under Rule 12(b)(1), the plaintiff must bear the burden of persuasion. See Mortensen v. First Fed. Sav. and Loan Ass'n,
The district court denied plaintiffs' motion for leave to amend because the proposed amended complaint would also fail to withstand a motion to dismiss. Denials of leave to amend a complaint under Fed.R.Civ.P. 15(a) are reviewed for abuse of discretion. Kiser v. General Elec. Corp.,
Since plaintiffs sought to amend their complaint to rectify certain defects, the allegations in the proposed amended complaint are the relevant ones for purposes of this appeal. This fact is not of great significance, since the amended complaint adds little additional information to that contained in the original. One difference is that the amended complaint drops Fidelcor, Inc. and Mario Giannini as defendants; thus, we do not consider any allegations against them. Since we have treated the district court's order as a Rule 12(b)(6) dismissal, we must accept as true all factual allegations in the amended complaint and all reasonable inferences that can be drawn from them. The amended complaint must be construed in the light most favorable to the plaintiffs, and can be dismissed only if the plaintiffs have alleged no set of facts upon which relief could be granted. Banks,
II. FACTUAL ALLEGATIONS
This case stems from the leveraged buyout of Kehr by James McMurtrie and Charles McMurtrie. The allegations of the amended complaint are as follows. See Amended Complaint at pp 15-31. On December 12, 1986, the McMurtries entered into an agreement to purchase Kehr. Fidelity agreed to provide $4,165,000 in financing, secured by the assets and accounts of Kehr, and by real estate owned by Charles McMurtrie and his wife Emily McMurtrie. The terms of the loans ranged from five to seven years. Neil Cohen and James Noon handled this loan package for Fidelity. At that time, Cohen was a commercial loan officer at the bank, and Noon was a vice-president.
The original understanding of the parties was that Fidelity would provide, as part of the total $4,165,000 loan, a credit line of $350,000 to be used as working capital for Kehr. Id. at pp 17-18. The eventual loan agreement included a $600,000 line of credit to be used as working capital, and to finance closing costs and pay off Kehr's prior debts. However, at the settlement on December 12, James McMurtrie discovered that this line of credit would be insufficient to fund the necessary $350,000 in working capital. During the settlement, Cohen and Noon, on behalf of Fidelity, made an oral commitment to lend an additional $185,000 for working capital. Cohen and Noon knew that Kehr would operate at a deficit during 1987, and that the working capital would be critically important. In reliance on this commitment, the McMurtries closed the deal and began operating Kehr. Id. at p 31.
Between December, 1986 and August, 1987, Cohen and Noon informed James McMurtrie by telephone "numerous" times that the $185,000 would be available as promised. Id. at p 32. However, Cohen and Noon had no intention of providing the money, and "made such commitments in order to induce Plaintiffs to complete the settlement and to insure that Defendant Fidelity Bank would be the recipient of large monthly interest payments, profits and collateral." Id. at p 33. Between December, 1986 and July, 1988, Fidelity mailed Kehr invoices for the loan payments. Apparently, during this period Kehr's financial situation became increasingly precarious.
By August, 1987, Cohen and Noon had left Fidelity. In September, responsibility for the Kehr loan was transferred to Thomas Donnelly, a vice-president of Fidelity. The McMurtries believed Donnelly was a high level management consultant who had lending authority. Id. at p 41. In reality, he worked in Fidelity's Asset Recovery Group, where he was responsible for protecting and recovering the bank's assets. James McMurtrie repeatedly demanded that Fidelity furnish the additional loan as promised, and Donnelly said that he would "review the credit file and terms and conditions of the loans to determine whether additional funds would be advanced by [Fidelity]." Id. at p 38. The amended complaint does not allege that Donnelly ever represented that the funds would be provided. In addition, Donnelly told James McMurtrie that he would commission an appraisal of Kehr's assets, and asked McMurtrie to draft a "plan of attack" demonstrating how Kehr's financial situation could be improved. According to the amended complaint, this request was "part of the course of conduct of Mr. Donnelly aimed at misleading Plaintiffs into believing that he would attempt to secure additional working capital." Id. at p 42. However, Donnelly never intended to do so, and in fact had no lending authority. In December, 1987, Donnelly mailed two loan invoices to Kehr. Id. at p 45.
In the summer of 1988, the McMurtries found a buyer for Kehr. Fidelity apparently had the contractual right to approve the sale, and Donnelly met with the prospective buyer on July 20, 1988. At this meeting, Donnelly announced that the Kehr loans were in default, and also disclosed that he worked in the Asset Recovery Group. On the same day, Donnelly mailed Kehr a notice of default and confessed judgment against the collateral. The buyer continued with the transaction, but Donnelly and Fidelity "unreasonably delayed" approving the sale, despite knowing that the buyer faced a specific deadline. Id. at p 54. As a result, the buyer withdrew its offer. In September, 1988, Donnelly ordered Kehr to cease operations and liquidate its assets.
III. STATUTORY LANGUAGE
The RICO statute authorizes civil suits by "[a]ny person injured in his business or property by reason of a violation of [18 U.S.C. Sec. 1962]." 18 U.S.C. Sec. 1964(c) (1988). Section 1962 contains four separate subsections, each addressing a different problem. Section 1962(a) prohibits "any person who has received any income derived ... from a pattern of racketeering activity" from using that money to acquire, establish or operate any enterprise that affects interstate commerce. Section 1962(b) prohibits any person from acquiring or maintaining an interest in, or controlling any such enterprise "through a pattern of racketeering activity." Section 1962(c) prohibits any person employed by or associated with an enterprise affecting interstate commerce from "conduct[ing] or participat[ing] ... in the conduct of such enterprise's affairs through a pattern of racketeering activity." Finally, section 1962(d) prohibits any person from "conspir[ing] to violate any of the provisions of subsections (a), (b), or (c)."
In this case, the amended complaint alleges violations of Secs. 1962(a), (b), (c) and (d). Case law has established separate requirements for certain subsections. Under Sec. 1962(a), a plaintiff must allege injury specifically from the use or investment of income in the named enterprise. Rose v. Bartle,
The Sec. 1962(c) claim is not subject to these nexus limitations, and therefore is a possible basis for liability here. However, while an entity can be both an enterprise and a defendant for purposes of Sec. 1962(a), such a dual role is impermissible in actions based on Sec. 1962(c). See Banks v. Wolk,
IV. THE "PATTERN" REQUIREMENT
A "pattern of racketeering activity" requires commission of at least two predicate offenses on a specified list. 18 U.S.C.A. Secs. 1961(1), (5) (1984 & Supp.1990). The predicate acts alleged in this case are instances of mail fraud in violation of 18 U.S.C. Sec. 1341. But a pattern requires more than commission of the requisite number of predicate acts. In H.J. Inc. v. Northwestern Bell Telephone Co.,
In H.J. Inc., customers of a telephone company alleged that the company had been bribing state regulatory officials to gain approval for excessive telephone rates. This alleged bribery occurred over a six-year period and consisted of cash and in-kind payments, and negotiations for future employment with the company. Id. at 232-33,
The Court emphasized that allegations cannot constitute a RICO "pattern" unless they satisfy both the "relatedness" and "continuity" tests. Both tests depend heavily on the specific facts of each case. The Court adopted a broad multi-factor test for relatedness, which focuses on whether the alleged predicate acts " 'are interrelated by distinguishing characteristics and are not isolated events.' " Id. at 240,
In discussing the continuity requirement, the Court rejected the theory that a RICO pattern requires proof that a defendant engaged in multiple criminal "schemes." Id. at 240,
Of course, not every single scheme comprising two or more predicate acts will constitute a pattern. Continuity refers "either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." Id. at 241,
This court has also noted other factors that are relevant to the "pattern" inquiry. In Barticheck v. Fidelity Union Bank/First Nat'l State,
In H.J. Inc., the Court found the requisite continuity. The Court first noted that "the racketeering predicates occurred with some frequency over at least a 6-year period, which may be sufficient to satisfy the continuity requirement."
Following H.J. Inc., this court affirmed dismissals in two cases for failure to allege a sufficient RICO pattern. In Marshall-Silver Construction Co. v. Mendel,
In Swistock v. Jones,
V. THE MAIL FRAUD ALLEGATIONS AND THEIR EFFECT ON THE PATTERN ANALYSIS
The district court found that the complaints failed to state valid claims of mail fraud. In some RICO cases, it will be clear that a defendant's actions do not constitute a pattern without an examination of the legal sufficiency of the predicate acts. But since the pattern inquiry must assess whether the defendant's actions "amount to or pose a threat of continued criminal activity," H.J. Inc.,
In cases involving allegations of mail fraud, this inquiry is complicated by the nature of the statute. The mail fraud statute prohibits any person from knowingly causing the use of the mails "for the purpose of executing" any "scheme or artifice to defraud." 18 U.S.C.A. Sec. 1341 (Supp.1990). The actual violation is the mailing, although the mailing must relate to the underlying fraudulent scheme. Moreover, each mailing that is "incident to an essential part of the scheme" constitutes a new violation. Pereira v. United States,
The mailing element is not very helpful in examining the sufficiency of a RICO pattern allegation. The relatedness test will nearly always be satisfied in cases alleging at least two acts of mail fraud stemming from the same fraudulent transaction--by definition the acts are related to the same "scheme or artifice to defraud." But the continuity test requires us to look beyond the mailings and examine the underlying scheme or artifice. Although the mailing is the actual criminal act, the instances of deceit constituting the underlying fraudulent scheme are more relevant to the continuity analysis.
For example, the "number of unlawful acts" is a factor in determining continuity. Barticheck v. Fidelity Union Bank/First Nat'l State,
Mail fraud and wire fraud are perhaps unique among the various sorts of "racketeering activity" possible under RICO in that the existence of a multiplicity of predicate acts (here, the mailings) may be no indication of the requisite continuity of the underlying fraudulent activity.
Hartz v. Friedman,
In this case, the loan invoices sent to Kehr constitute the main basis for the mail fraud allegations. But the quantity of otherwise innocent invoices cannot by itself transform defendants' alleged fraud into a RICO pattern. It should not be relevant, for example, that Fidelity sent invoices on a monthly basis, rather than quarterly or yearly. However, if a defendant committed numerous acts of deceit as part of multiple schemes or a single ongoing fraud, this fact would be relevant to the continuity question, although not necessarily dispositive. Moreover, it would be relevant if particular mailings, unlike those in this case, contained false or misleading statements or otherwise constituted separate deceptive acts.
The importance of focusing in the continuity analysis on deceptive activity rather than otherwise innocent mailings is demonstrated by the holding in H.J. Inc. that continuity can be shown when "the predicate acts or offenses are part of an ongoing entity's regular way of doing business."
At this time, we need not decide precisely which types or combinations of fraudulent actions will present the requisite continuity. But we note that the mailings in this case present a different situation from that recently faced by the Court of Appeals for the First Circuit in Fleet Credit Corp. v. Sion,
The court noted, however, that each separate mailing constituted a new breach of the defendants' promise not to remove, transfer, or destroy the collateral. Id. at 443. Thus, the defendants' deceptive activities were ongoing during the entire four and one-half year period, and each mailing constituted a new fraudulent act. Moreover, during this period, the defendants applied for and received two new loans. In this case, by contrast, the mailings did not constitute separate fraudulent actions, but related entirely to the initial allegedly deceptive actions of the defendants. We do not believe that the Fleet court focused on the number and duration of the mailings without considering their integral connection to the ongoing long-term deceptive activities.2
We now examine the allegations of deceptive activity in this case. Under the mail fraud statute, a scheme or artifice to defraud "need not be fraudulent on its face, but must involve some sort of fraudulent misrepresentations or omissions reasonably calculated to deceive persons of ordinary prudence and comprehension." United States v. Pearlstein,
The amended complaint alleges that Cohen and Noon misrepresented on numerous occasions that the additional funds would be provided. Since these appear to be actionable misrepresentations, we will assume without deciding that the amended complaint sufficiently alleges that Cohen and Noon have engaged in a "scheme or artifice to defraud" in violation of the mail fraud statute. We also will assume without deciding that the invoices sent to Kehr satisfy the "mailing" element. Thus, we will assume that Cohen and Noon have committed predicate acts of mail fraud. We note, however, that the district court held that defendants' actions could not constitute mail fraud because plaintiffs "offer[ed] no evidence to suggest the statements the bank mailed out were inaccurate, or fraudulent in any way." This analysis was incorrect. As the Supreme Court recently held in Schmuck v. United States,
The allegations against Donnelly are of a different sort. The amended complaint asserts that Donnelly engaged in three separate deceptive actions after Cohen and Noon had left Fidelity. First, Donnelly's request for a "plan of attack" was part of a scheme to "mislead[ ] Plaintiffs into believing that he would attempt to secure additional working capital." Amended Complaint at p 42. Although Donnelly said that he would attempt to secure additional working capital, unlike Cohen and Noon he never represented that the capital would be provided. Second, Donnelly did not disclose that he worked in the Asset Recovery Group, and that he had no lending authority. Third, he "unreasonably delayed" approving the proposed sale of Kehr.
Even construing the complaint in the light most favorable to appellants, none of these allegations could form the basis for a separate mail fraud violation on the part of Donnelly. We recognize that the mail fraud statute has been "expansively construed." United States v. Boffa,
The "plan of attack" request falls squarely within the ambit of normal business communications, especially considering the financial state of Kehr, and contains no deceptive elements. Cf. Blount Financial Servs., Inc. v. Walter E. Heller & Co.,
Moreover, even if these actions were somehow deceptive, they were calculated only to mislead plaintiffs into believing that Donnelly would "attempt" to secure additional funds. Since Donnelly never indicated that the funds would be provided, there was no deceit nor fraud within the meaning of the mail fraud statute. By contrast, the deceptions of Cohen and Noon are alleged to have caused plaintiffs to close the deal and incur injury when the funds were not provided. We note that 18 U.S.C. Sec. 1346, which amended the mail fraud statute to include schemes that "deprive another of the intangible right of honest services," does not apply to this case, since all of the defendants' alleged actions occurred prior to the effective date of the statute. See 18 U.S.C.A. Sec. 1346 (Supp.1990) (effective Nov. 18, 1988) (overruling McNally v. United States,
Finally, the allegation that Donnelly "unreasonably delayed" approving the sale of Kehr, while possibly amounting to a breach of contract, contains no deception that would bring it within the purview of the mail fraud statute. Cf. United States v. Kreimer,
We emphasize that the responsibility for determining the factual sufficiency of fraud allegations remains with the fact-finder. In this case, though, the allegations against Donnelly simply contain no indication of the deception or overreaching which the mail fraud statute requires. We also recognize that appellants possibly could have demonstrated at trial that Donnelly was engaged in a common mail fraud scheme with Noon and Cohen. See, e.g., United States v. Camiel,
VI. THE "PATTERN" ALLEGATION IN THIS CASE
Plaintiffs in this case have not sufficiently alleged that defendants engaged in a "pattern of racketeering activity." Since the complaint alleges numerous acts of mail fraud related to the common purpose of causing Kehr to default on its loans, the relatedness requirement is satisfied. But the amended complaint does not set forth acts that "amount to or pose the threat of continuing criminal activity." Rather, as in Marshall-Silver and Banks, the allegations here involve a short-term attempt to force a single entity into bankruptcy, and contain no additional threat of continued criminal activity. Nor does this case involve a "long-term association that exists for criminal purposes." See H.J. Inc.,
We have established that the critical acts for purposes of the continuity analysis are the misrepresentations of Cohen and Noon. The same misrepresentations regarding the additional loan were repeated "numerous" times over an eight month period. H.J. Inc. holds that the actual or threatened duration of a scheme is an important factor in determining whether a defendant's actions amount to long-term criminal activity. When mail fraud is alleged, the question of duration becomes more difficult. As we noted in Marshall-Silver, "[v]irtually every garden-variety fraud is accomplished through a series of wire or mail fraud acts that are 'related' by purpose and are spread over a period of at least several months."
However, we do not place much emphasis on the fact that the mailings might have continued for years. As we have noted, a defendant's deceptive actions are more important to the continuity analysis than otherwise innocent mailings. Thus, the relevant criminal conduct occurred during the initial eight month period, when the misrepresentations were made. We noted in Marshall-Silver that the duration of a scheme should not be afforded overriding significance "in the absence of a more significant societal threat." Id. Since we found the scheme in that case to be sufficiently short-term, we did not rely on this statement and need not embrace it at this time. But see United States Textiles, Inc. v. Anheuser-Busch Cos.,
We must apply a "natural and common-sense approach to RICO's pattern element." H.J. Inc.,
This case, therefore, is unlike H.J. Inc., which involved six years of bribes directed at five members of a regulatory agency. The alleged bribes were numerous and varied, consisting of cash payments, job negotiations, and payments for meals and entertainment. See
Besides the significant disparity in longevity between the schemes in H.J. Inc. and the present case, there are other salient differences. First, there is no apparent threat that the misrepresentations of Cohen and Noon would have continued past the time they left Fidelity. By contrast, the regulatory decisions involved in H.J. Inc. were a continuous part of the defendant's business, and thus the bribes likely would have continued into the future. Unlike Swistock, the additional confirmatory misrepresentations of Cohen and Noon did not concern future transactions, and thus do not pose a threat of additional criminal activity. There is no indication that Cohen or Noon made other false statements to Kehr, or treated other customers in a similar manner. Consequently, the allegations in the amended complaint do not indicate that fraud was "a regular way of doing business" for any defendant. Cf. H.J. Inc.,
Second, the bribes in H.J. Inc. were individually directed at five different officials. As we noted in Swistock, the Supreme Court did not rely on the fact that the actual victims of the bribes--the telephone company's customers--were numerous. See
Third, each bribe in H.J. Inc. separately contributed to the injury inflicted on the plaintiffs. Cf. Morgan v. Bank of Waukegan,
VII. CONCLUSION
Plaintiffs may have valid claims of common law fraud or breach of contract, but based on the allegations of the complaint and the proposed amended complaint, which we have assumed throughout are true, they cannot maintain a RICO suit. Thus, we will affirm the dismissal of the RICO and pendent state law claims against all defendants, and the denial of plaintiffs' motion for leave to amend their complaint.
ALITO, Circuit Judge, concurring in part and dissenting in part.
I concur in the decision of the court insofar as it affirms the dismissal of the plaintiffs' claims under 18 U.S.C. Sec. 1962(a) and (b), but I would reverse the dismissal of plaintiffs' claims under 18 U.S.C. Sec. 1962(c) and (d). As the majority notes, denial of plaintiffs' motion for leave to amend and the dismissal of their claims may be sustained only if the amended complaint proffered by the plaintiffs failed to state a claim upon which relief could be granted. Maj. op. at 1408-10. The majority affirms the dismissal of the claims under 18 U.S.C. Sec. 1962(c) and (d) on the ground that the amended complaint did not sufficiently allege a "pattern" of racketeering activity. I respectfully disagree with the majority's analysis of the pattern requirement and with its application in the present case.
I.
The amended complaint alleged that the bank and several officers carried out a scheme to defraud the McMurtries, who obtained more than four million dollars of secured loans to finance their leveraged buyout of Kehr Packages, Inc. The bank and its officers allegedly induced the McMurtries to enter into loan agreements that provided insufficient working capital for successful operation of the company. This was accomplished, the complaint asserts, by fraudulent oral promises that additional financing would be provided. According to the complaint, the purpose of this scheme was to obtain large interest payments and, ultimately, the pledged collateral, which exceeded the value of the loans. The complaint alleged that the defendants, in carrying out this scheme, committed numerous acts of mail fraud, 18 U.S.C. Sec. 1341, during a period of one year and seven months, from December 1986 to July 1988.
The specific factual allegations in the complaint are set out in the majority opinion (maj. op. at 1410-11), but the following salient allegations merit emphasis. At the settlement of the loans on December 12, 1986, two bank officers, Neil Cohen, a commercial loan officer, and James Noon, a vice president, orally promised that an additional $185,000 in working capital would be provided. App. 241a-42a. For the next eight months, Cohen and Noon repeated this promise during "numerous" telephone conversations with James McMurtrie. Id. at 242a. Cohen and Noon, however, never intended to fulfill their promises but made them to obtain interest payments and the pledged collateral for their employer. Id. at 243a.
In September 1987, after Cohen and Noon had left the bank, Thomas Donnelly, another vice president, took over responsibility for the loan and began a "course of conduct ... aimed at misleading plaintiffs into believing that he would attempt to secure additional working capital" when his real purpose was to prepare for foreclosure on the assets of the company and the personal assets of the McMurtries. Id. at 243a-46a. To carry out this plan, Donnelly "act[ed] for months on the pretense of being a management consultant" (id. at 248a) although he actually worked in the bank's Asset Recovery Group. Id. at 245a-46a, 248a. Donnelly promised to look into the question of increased working capital, when in fact he had no intention of doing so. Id. at 244a-46a. He also requested that plaintiffs draft a "plan of attack" for profitably operating the company, although he was actually preparing for foreclosure. Id. at 245a-46a. Finally, Donnelly undermined an agreement for sale of the company during the summer of 1988 by unreasonably delaying approval of the transaction, and in September 1989 he ordered Kehr to cease operations and liquidate. Id. at 248a-49a. I stress that these are merely the unproven factual allegations in the complaint, but at the present stage we are bound to accept them as true. In my view, these allegations sufficiently allege a "pattern of racketeering activity."
II.
The RICO statute, 18 U.S.C. Sec. 1961(1) defines "racketeering activity" to mean any of a long list of predicate offenses, including mail fraud (18 U.S.C. Sec. 1341). The statute states that a " 'pattern of racketeering activity' requires at least two acts of racketeering activity" (18 U.S.C. Sec. 1961(5)) (emphasis added). The complaint in this case alleges more than two such acts.
In H.J. Inc. v. Northwestern Bell Telephone Co.,
In H.J. Inc.,
The open-ended concept of continuity refers to a series of predicate acts that is cut short, either by law enforcement efforts or other intervening events, but that threatened long-term criminal conduct. Id. In H.J. Inc., the Court gave several examples of how such threatened criminal conduct may be shown. In some cases, the Court noted (id. 242), it may be proven that the perpetrators expressly threatened repeated acts of racketeering. In other cases, the Court observed (id.), it may be shown that the predicate offenses were part of an ongoing entity's regular way of doing business, thus giving rise to the inference that such offenses would have continued if not interrupted.
In addition to these examples provided by the Supreme Court, several factors previously identified by this court are useful in determining whether a threat of future racketeering acts has been alleged or shown. Factors such as the number of unlawful acts, the number of perpetrators, the number of victims, and the character of unlawful activity (Barticheck v. Fidelity Union Bank/First National State,
Although the discussion of this concept in H.J. Inc. is brief, the Court's opinion makes clear, in my view, that the predominant, if not sole, consideration in determining whether a closed-ended pattern has been alleged or proven is the duration of the racketeering activity. The Court stated flatly (
Whether or not closed-ended continuity contains any such additional component, it seems clear that several factors have no place in determining whether closed-ended continuity has been alleged or shown. First, the absence of any threat of future racketeering activity is irrelevant in determining whether closed-ended continuity is present. The threat of future criminal activity is the essence of open-ended continuity but has no bearing on closed-ended continuity, which refers by definition to repeated conduct that has fully run its course.
Second, many of the factors listed by this court in Barticheck and related cases, with the obvious exception of "the length of time" of the criminal conduct (Barticheck,
Since closed-ended continuity, as described in H.J. Inc., is primarily a question of duration, it is critical to zero in on the line between "a substantial period of time," which may satisfy H.J. Inc., and "a few weeks or months," which do not.
By contrast, in Swistock v. Jones,
The relevant legislative history points to the same result. In concluding that the "pattern" element necessitates proof of "continuity," the Supreme Court relied1 primarily upon the following passage from the Senate Report on RICO (S.Rep. No. 91-617, at 158 (1969) (emphasis added):
The target of [RICO] is ... not sporadic activity. The infiltration of legitimate business normally requires more than one "racketeering activity" and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.
This seminal passage appears to measure "continuity" by reference to the period of time normally required for the infiltration of legitimate business. As the Supreme Court has recognized, preventing the infiltration of legitimate business by organized crime was the major objective expressed during congressional consideration of the RICO statute.2
In light of this legislative history, closed-ended continuity should not require racketeering activity extending over a longer period of time than Congress felt would normally be required for the infiltration of a legitimate business by means of the various RICO predicates, such as murder, kidnapping, arson, bribery, or fraud. 18 U.S.C. Secs. 1961(1) and 1962(b). It would be anomalous to construe the concept of closed-ended continuity so narrowly that efficient campaigns to infiltrate legitimate businesses--the heart of congressional concern when RICO was originally enacted--are excluded from the coverage of that concept. And there is no reason to suppose that Congress felt such campaigns ordinarily take longer than 19 months (the period at issue here) or 14 months (the period in Swistock ). Accordingly, in my view, the 19 month period alleged in this case constituted, in the terminology of H.J. Inc.,
III.
Although the complaint in this case alleges acts of mail fraud extending over a period of 19 months, the majority whittles this period down to eight months. The majority achieves this result in two stages. First, the majority concludes that in RICO cases grounded on mail fraud predicates the duration of the racketeering activity should be measured, not by the duration of the mail fraud violations, which may be based on "innocent" mailings, but by the duration of the "instances of deceit." Maj. op. at 1413-15. Second, the majority concludes that the only relevant "instances of deceit" in this case are the alleged misrepresentations of Cohen and Noon, because the allegations against Donnelly, when viewed in isolation, do not establish criminal conduct. Maj. op. at 1415-17. I disagree with both parts of this analysis.
The first part of this analysis is inconsistent with the plain language of the RICO statute. The statute, 18 U.S.C. Sec. 1961(1), equates "racketeering activity" with the listed predicate offenses.3 Therefore, the duration of racketeering activity for the purpose of judging closed-ended continuity must equal the duration of the related predicates.
Moreover, even if it were proper in a case with mail fraud predicates to look beyond the duration of the mail fraud violations and measure the duration of the deceitful conduct, the focus of inquiry should be on the fraudulent scheme, not the repetition of fraudulent statements. If a fraudulent scheme is launched convincingly, there may be no need for a repetition of the fraudulent statements made at the outset. But as long as the scheme continues--as long as the original false statements are left uncorrected and victims continue to be deceived--the deceitful conduct must be regarded as continuing. Under the majority's analysis, the deceitful conduct in such a case would apparently be regarded as finished once the original false statements were made--although the deceitful conduct would apparently be regarded as continuing if the original false statements were not entirely convincing and therefore had to be repeated over and over. This approach does not seem to make sense.4
The second part of the majority's analysis is also flawed. The majority labors to show that if the allegations against Cohen and Noon are disregarded, the remaining factual allegations against Donnelly would not establish that he committed mail fraud; the majority then reasons that the allegations against Donnelly should not be considered in calculating the duration of the deceitful activity. Maj. op. at 1415-17.
In my view, there is no justification for examining the specific allegations against Donnelly in isolation. Fairly read, the complaint alleges that Cohen and Noon launched the fraudulent scheme with outright misrepresentations and that Donnelly later joined the scheme and perpetuated it by means of statements and conduct that were misleading in light of what Cohen and Noon had said and done before. Consequently, I think it is entirely artificial to judge Donnelly's alleged behavior without considering its claimed role in the entire scheme.
In the present case, the complaint alleged that the fraudulent scheme and the mailings in furtherance of the scheme continued for 19 months. That period, I believe, is ample to show closed-ended continuity.
Notes
The Honorable Dolores K. Sloviter became Chief Judge of the Third Circuit on February 1, 1991
Because we hold that plaintiffs did not state a valid claim under Sec. 1962(c), see infra at 1417-19, we need not consider whether the dependent Sec. 1962(d) claim has been properly alleged. Cf. Rose v. Bartle,
In dicta, the court noted that "[a] threat of criminal activity ... is not established merely by demonstrating that common law fraud was a regular way of conducting [the defendants' ] ongoing business. Rather, [the plaintiff] must demonstrate that the predicate acts --here the acts of mail fraud--were a regular way of conducting the ongoing business." Id. at 448 (emphasis in original). It does not appear that the court was emphasizing the mailings over the underlying fraud. Instead, the court likely was referring to the fact that a plaintiff must sufficiently allege a connection between a particular fraudulent scheme and some mailing. See id. at 444-45 (apparently finding that plaintiffs did not sufficiently plead connection between certain allegations of common law fraud and use of mails)
Mail fraud can also be predicated on mailings made after the completion of the scheme, but which are " 'designed to lull the victims into a false sense of security, postpone their ultimate complaint to the authorities, and therefore make the apprehension of the defendants less likely than if no mailings had taken place.' " United States v. Lebovitz,
We follow the other Courts of Appeals that have held that Sec. 1346 has no retroactive effect. See United States v. Telink, Inc.,
H.J. Inc.,
In United States v. Turkette,
[T]he legislative history forcefully supports the view that the major purpose of [RICO] is to address the infiltration of legitimate business by organized crime. The point is made time and again during the debates and in the hearings before the House and Senate.
The statute provides in pertinent part (18 U.S.C. Sec. 1961(1)) that "racketeering activity" means any of a long list of predicates, including "(B) any act which is indictable under any of the following provisions of title 18, United States Code: ... section 1341 (relating to mail fraud)."
The term "innocent mailings" confuses analysis of the question before us. This is a term of art that was used in Schmuck v. United States,