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KAUSHAL v. STATE BANK OF INDIA

United States District Court, Northern District of Illinois, E.D


February 2, 1983

SATYA P. KAUSHAL, ET AL., PLAINTIFFS,
v.
STATE BANK OF INDIA, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Satya Kaushal ("Kaushal"), Vinod Kaushal and Raja Enterprises, Inc. and its subsidiaries (collectively "Raja Companies") have sued the State Bank of India ("SBI"), several of its officers and employees and several other individual and corporate defendants for treble damages and injunctive relief under 18 U.S.C. § 1964(c) ("Private RICO" or, consistently with the manner in which all other sections of Title 18 are cited in this opinion, "Section 1964(c)").*fn1 Plaintiffs have also asserted pendent state law claims for damages and injunctive relief. SBI and its officers and employees*fn2 have moved to dismiss under Rule 12(b)(1).*fn3 For the reasons stated in this memorandum opinion and order, defendants' motion is granted in part and denied in part.

Facts*fn4

For a number of years before May 1981, SBI had an extensive business relationship with Patson Enterprises, Inc. and its affiliated corporations (collectively "Patson Companies"). During that time SBI officers N.G. Pallai ("Pallai") and Annada Kumar ("Kumar") had close business and personal relationships with Naren Soni ("Soni"), Patson Companies' principal shareholder.

By late 1979 or early 1980 SBI had more than $2 million in loans outstanding to Patson Companies. Pallai, Kumar and Soni knew (1) Patson Companies could not repay those loans to SBI, (2) Soni was personally liable to SBI on the loans and (3) SBI officials in Bombay would judge unfavorably the performance of Pallai and Kumar in making the loans to Patson Companies.

Pallai, Kumar and Soni conceived and executed a scheme to defraud plaintiffs by conducting and operating SBI and Patson Companies by a pattern of racketeering activities, including numerous uses of the United States mails in violation of Section 1341. Acting to benefit themselves, SBI and Patson Companies, they presented Kaushal with false financial statements that intentionally overstated the assets and understated the liabilities of Patson Companies by more than $700,000. Thereby the three induced Kaushal to organize Raja Companies and through those companies, in May 1981, to purchase the assets and to assume the liabilities of Patson Companies (including the debt to SBI). With the participation of at least five other SBI employees,*fn5 the three also used the mails to induce Kaushal and his wife Vinod Kaushal to guarantee the Raja debts personally, securing the debts with their personal assets.

It was also part of the scheme that, as plaintiffs began discovering the fraud, SBI would seize by foreclosure the one solvent business in the Raja group, the Khyber India Restaurant (the "Restaurant") and sell it to Chatwal Hotels & Restaurants, Inc. ("Chatwal Corp.") and its principal, Sant Chatwal ("Chatwal"), an important SBI customer in New York. This aspect of the proposed scheme (not yet implemented) has been conducted by seven persons*fn6 and also involved numerous violations of Section 1341.

Scope of Private RICO

Private RICO, part of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), Sections 1961-68, reads:

  Any person injured in his business or property by
  reason of a violation of section 1962 of this
  chapter may sue therefor in any appropriate
  United States district court and shall recover
  threefold the damages he sustains and the cost of
  the suit, including a reasonable attorney's fee.

Section 1962 in turn specifies the activities prohibited under RICO. Private RICO thus creates a private right of action tied by its very terms to the proscription of certain criminal conduct.

As RICO's very name suggests, and as United States v. Turkette, 452 U.S. 576, 591, 101 S.Ct. 2524, 2532, 69 L.Ed.2d 246 (1981) teaches, "the major purpose of [RICO] is to address the infiltration of legitimate business by organized crime." From this fact defendants argue (Dec. 8 Mem. 5-10) the present action falls outside the spirit (if not the letter) of RICO because there are no allegations defendants are in any way connected with organized crime.

Most courts have an understandable intuitive reaction that Private RICO was not intended — and should therefore not be construed — to sweep up the entire universe of common law fraud. Perhaps for that very reason, defendants' argument has met with some success in the courts. See Bennett v. Berg, 685 F.2d 1053, 1063 (8th Cir. 1982) (citing cases), rehearing en banc, Jan. 12, 1983. But the weight of both judicial and scholarly authority is properly against employing such reasoning. See id. at 1063-64. In the criminal context our own Court of Appeals has held RICO does not require proof a defendant is connected with organized crime. United States v. Aleman, 609 F.2d 298, 303-04 (7th Cir. 1979), cert. denied, 445 U.S. 946, 100 S.Ct. 1345, 63 L.Ed.2d 780 (1980). It should also follow that a cause of action under Private RICO, predicated on violations of Section 1962, would lie though there is no allegation defendants are involved with organized crime or racketeers.

Although it too rejects that entirely unfounded limitation on Private RICO, this Court has expressed its own concern lest Section 1964(c) become a vehicle for asserting "garden variety fraud claims" in federal court. Parnes v. Heinold Commodities, Inc., 548 F. Supp. 20, 23 (N.D.Ill. 1982); see also Fields v. National Republic Bank of Chicago, 546 F. Supp. 123, 124-25 (N.D.Ill. 1982); Salisbury v. Chapman, 527 F. Supp. 577, 579-81 & nn. 2-6 (N.D.Ill. 1981). However, this Court has not permitted that concern to override reasoned statutory construction. Instead the analysis it has employed avoids both potential vices: (1) judicial emasculation of the broad language Congress actually used in RICO (see Parnes, 548 F. Supp. at 22-23) and (2) illegitimate transformation of common law fraud claims into federal claims by use of the RICO mold (see Fields, 546 F. Supp. at 124-25).

Section 1962 sets out three basic patterns of prohibited activities and a related conspiracy provision:

  (a) It shall be unlawful for any person who has
  received any income derived, directly or
  indirectly, from a pattern of racketeering
  activity or through collection of an unlawful
  debt in which such person has participated as a
  principal . . . to use or invest, directly or
  indirectly, any part of such income, or the
  proceeds of such income, in acquisition of any
  interest in, or the establishment or operation
  of, any enterprise which is engaged in, or the
  activities of which affect, interstate or foreign
  commerce. . . .

  (b) It shall be unlawful for any person through a
  pattern of racketeering activity or through
  collection of an unlawful debt to acquire or
  maintain, directly or indirectly, any interest in
  or control of any enterprise which is engaged in,
  or the activities of which affect, interstate or
  foreign commerce.

  (c) It shall be unlawful for any person employed
  by or associated with any enterprise engaged in,
  or the activities of which affect, interstate or
  foreign commerce, to conduct or participate,
  directly or indirectly, in the conduct of such
  enterprise's affairs through a pattern of
  racketeering activity or collection of unlawful
  debt.

  (d) It shall be unlawful for any person to
  conspire to violate any of the provisions of
  subsections (a), (b), or (c) of this section.

Those patterns do sweep broadly, especially given the expansive definitions of "racketeering activity," "person," "enterprise" and "pattern of racketeering activity" in Sections 1961(1) and 1961(3)-(5) ("Section 1961"). Nevertheless it is against those patterns that Private RICO claims must be tested. Strict adherence to Congress' language will sustain only claims meeting Congress' own tests. Such an approach ("strict constructionism," if you will) both accepts the breadth of Congress' language and honors the limits of Congress' provision of a federal cause of action.

In other words, a defendant should face Private RICO liability only if alleged to have assimilated himself by his own conduct to the patterns of conduct Congress proscribed.*fn7 Plaintiffs' Complaint will be measured by that yardstick.

Count I: Private RICO Damages

Section 1964(c) grants a damages remedy to those injured "by reason of a violation of section 1962." It is only logical to couple such "violation" with the law violator under Section 1962: the "person" whose activity is labeled as "unlawful" in that section. See Parnes, 548 F. Supp. at 23-24.*fn8 Thus the proper question is whether the Complaint sufficiently alleges facts that, if true, would place defendants in violation of Section 1962.*fn9

Plaintiffs have focused on Section 1962(c). That section's violation requires (Parnes, 548 F. Supp. at 23):

    (1) two parties, a "person" employed by or
  associated with an "enterprise"; and

    (2) participation by the "person" in the
  conduct of the "enterprise" via a "pattern of
  racketeering activity."

Certainly the Complaint's allegations are sufficient to place SBI, Pallai, Kumar and Soni in violation of Section 1962(c) or, in other words, to identify them as potentially liable Private RICO "persons."
*fn10

Complaint ¶ 17 alleges Soni, Pallai and Kumar, the latter two acting of course as SBI officers and for SBI's benefit (id. ¶ 18), conducted and operated Patson Companies, "enterprises" allegedly engaged in interstate commerce (id. ¶ 8), by a pattern of "racketeering activity" (numerous acts of mail fraud aimed at Kaushal). Thus those allegations have set out four RICO "persons," a RICO "enterprise," the character of their "association,"*fn11 and the unlawful acts that are predicates for RICO liability. See Section 1961(1)(B) (including mail fraud in list of "racketeering activity") and Section 1961(5) (defining "pattern" as at least two acts of racketeering activity within a specified time frame).*fn12

No allegations tie the other SBI officers to actual participation (direct or indirect) in the conduct of Patson Companies' affairs. Complaint ¶ 19 says C. Gupta, Angle, Deepa, Sadasivan and Sridhran participated in causing Kaushal and his wife to guarantee the Raja Companies' loans from SBI, but there is no indication this aspect of the alleged scheme involved Patson Companies at all. Similarly Complaint ¶ 20 says Sadasivan, Sridhran, B. Gupta and Padnaban participated in SBI's plan to reclaim the Restaurant, but here too no involvement with Patson Companies is indicated.

Moreover, there is no allegation those seven SBI officials conspired to conduct Patson Companies' affairs through racketeering activities, as contrasted with conspiring in the plans to obtain the loan guaranties and to reclaim the Restaurant. Thus Section 1962(d) is not available to connect those seven to the SBI-Pallai-Kumar-Soni violation of Section 1962(c).

That is not the end of the Private RICO story, however. It is surely conceptually possible for two RICO "enterprises" to have been involved here — not only Patson Companies but SBI itself. From the latter perspective, shifting SBI chameleon-like from "person" to "enterprise," the same analysis would involve those seven officers*fn13 as "persons" engaged in the "conduct of [SBI's] affairs through a pattern of racketeering activity . . .": obtaining the loan guaranties and planning reclamation of the Restaurant through Section 1341 violations.

Accordingly Count I stands not only against the SBI-Pallai-Kumar-Soni group but against the seven SBI officers as well.*fn14 Only Sharma among the SBI cast of characters is dismissed.

Count H: Private Equitable Relief under RICO

Complaint Count II seeks to block SBI's sale of the Restaurant and to divest defendants of any interest they have acquired in the Restaurant. That prayer for broad equitable relief under RICO forces consideration of the threshold question whether Section 1964 makes equitable remedies available to Private RICO plaintiffs. In turn that "difficult question"*fn15 involves complex issues of statutory construction and legislative intent that, so far as this Court is aware, have not been fully explored by any court.*fn16

Section 1964 provides (although quoted earlier, Private RICO is repeated for ease of comparison and analysis):

  (a) The district courts of the United States
  shall have jurisdiction to prevent and restrain
  violations of section 1962 of this chapter by
  issuing appropriate orders, including, but not
  limited to: ordering any person to divest himself
  of any interest, direct or indirect, in any
  enterprise; imposing reasonable restrictions on
  the future activities or investments of any
  person, including, but not limited to,
  prohibiting any person from engaging in the same
  type of endeavor as the enterprise engaged in,
  the activities of which affect interstate or
  foreign commerce; or ordering dissolution or
  reorganization of any enterprise, making due
  provision for the rights of innocent persons.

  (b) The Attorney General may institute
  proceedings under this section. In any action
  brought by the United States under this section,
  the court shall proceed as soon as practicable to
  the hearing and determination thereof. Pending
  final determination thereof, the court may at any
  time enter such restraining orders or
  prohibitions, or take such other actions,
  including the acceptance of satisfactory
  performance bonds, as it shall deem proper.

  (c) Any person injured in his business or
  property by reason of a violation of section 1962
  of this chapter may sue therefor in any
  appropriate United States district court and
  shall recover threefold the damages he sustains
  and the cost of the suit, including a reasonable
  attorney's fee.

  (d) A final judgment or decree rendered in favor
  of the United States in any criminal proceeding
  brought by the United States under this chapter
  shall estop the defendant from denying the
  essential allegations of the criminal offense in
  any subsequent civil proceeding brought by the
  United States.

  No clear indication is given by the statute itself as to how the express grant of a private damages remedy in Private RICO is related to the broad grant of courts' equitable "jurisdiction" in Section 1964(a).

Two commentators have asserted the use of "and [shall]" (instead of "to") before the treble-damages recovery clause in Private RICO implies the private damages remedy is in addition to other equitable remedies. Blakey and Gettings, Racketeer Influenced and Corrupt Organizations (RICO): Basic Concepts — Criminal and Civil Remedies, 53 Temple L.Q. 1009, 1038 & n. 133 (1980) ("Basic Concepts").*fn17 This Court finds that reading bizarre and wholly unconvincing as a matter of plain English and the normal use of language.*fn18 Moreover, even were the word "and" so unexpectedly pregnant with meaning (as it is not), the commentators' argument would not explain why the "implied" equitable remedies would encompass those listed in Section 1964(a), including divestiture. Section 1964(a) by its terms confers "jurisdiction" on the federal courts but speaks neither of a "cause of action" nor of "relief." As Davis v. Passman, 442 U.S. 228, 99 S.Ct. 2264, 60 L.Ed.2d 846 (1979) teaches, those concepts are distinct, and confirmation of court jurisdiction does not in itself indicate who may invoke the court's power or what remedies are available to him.*fn19]

Section 1964(c) certainly in terms grants only a private treble-damages remedy. True, it does not expressly say "only" the damages remedy is granted,*fn20 and Section 1964(a) does not say "only" the government may seek its illustrative equitable remedies. See Strafer, Massumi and Skolnick, Civil RICO in the Public Interest: "Everybody's Darling," 19 Amer.Crim.L.Rev. 655, 710 (1982) ("Public Interest"). But the fair reading of the statute is its literal one — that Section 1964(b) defines who "may institute proceedings under this section [1964]": the Attorney General. At most the statute is arguably ambiguous.

To the extent the statute may be viewed as ambiguous, this Court must turn to the legislative history to divine legislative intent. In this instance, as in many others, the legislative history is not precise. On the whole, however, that history strongly indicates Congress did not intend to grant private RICO plaintiffs equitable remedies in addition to the legal remedy provided in Section 1964(c). That conclusion is compelled if this Court follows, as it must, applicable Supreme Court guidelines.

RICO began as a Senate bill, S.30, 91st Cong., 1st Sess. (1969). As reported by the Senate Judiciary Committee S.30 § 1964 did not contain a private right of action provision at all, and the committee report therefore discussed only civil RICO actions by the United States. S.Rep. No. 617, 91st Cong. 1st Sess. 24, 34, 80-83, 160 (1969).*fn21 Some nine months later, when S.30 was reported as amended by the House Judiciary Committee, a private treble damages remedy had been added to its Section 1964. H.R.Rep. No. 1549, 91st Cong., 2d Sess., reprinted in 1970 U.S.Code Cong. & Ad. News 4007, 4010, 4034. Thus the private damages remedy was engrafted onto a statutory scheme that had been complete on its own terms (with Section 1964(a) conferring jurisdiction and Section 1964(b) defining who could invoke it).

Two inferences may logically be drawn from the legislative history (both the statutory structure and the committee reports):

    1. Section 1964(c) is quite independent of
  Section 1964(a).

    2. Section 1964(a)'s provisions spell out the
  governmental equitable remedies available under
  Section 1964(b), not the private remedy available
  under Section 1964(c).

Additionally persuasive is the fact the House Committee's description of S.30 § 1964(a) follows almost verbatim the Senate Committee's description of that subsection (without the slightest hint of any expansion of coverage to parallel the newly-added private damages remedy). Compare H.R.Rep. No. 1549, reprinted in 1970 U.S. Code Cong. & Ad.News at 4034, with S.Rep. No. 617 at 160. The House's repetition of the language that "the list [of remedies] is not exhaustive," first expressed by the Senate when only the government could sue at all, belies the effort by Basic Concepts at 1038 n. 132 to find in that language the implication of private equitable remedies. Plainly the House Committee's addition of the private damages remedy had not altered the public-action thrust of the other subsections of S.30 § 1964.

Moreover the Senate Committee Report emphasizes the analogy of Section 1964 to the antitrust laws. S.Rep. No. 617 at 81-82. That general analogy was clearly behind much of Congress' thinking in enacting the civil RICO provisions. See Basic Concepts at 1040-43; Public Interest at 688-89, 712. But by sharp contrast with Section 1964, the antitrust laws specifically and in terms provide a separate private equity action in addition to a private treble damages remedy. 15 U.S.C. § 15 and 26.*fn22 Had it so desired, Congress could have completed the analogy of Private RICO to the antitrust laws by including a private equitable relief remedy. It did not do so, contrary to the expressed wishes of certain Congressmen, see Public Interest at 712 nn. 388-89, and despite the fact earlier "RICO" proposals had included such private equitable remedies, id. at 712-13 & nn. 393, 395.

At least two other courts have expressed strong doubts Section 1964(c) grants private plaintiffs an injunctive remedy. Dan River (cited at n. 15); Ashland Oil, Inc. v. Gleave, 540 F. Supp. 81, 85 (W.D.N.Y. 1982). One district court has entered a preliminary injunction in an action brought in part under RICO, USACO Coal Co. v. Carbomin Energy, Inc., 539 F. Supp. 807, 814-16 (W.D.Ky. 1982), but the court did not at all address the question discussed in this opinion. Indeed, in affirming the district court the Court of Appeals for the Sixth Circuit linked the preliminary injunction solely to plaintiffs' rights to reach defendants' property under the complaint's state law claim. As the Court of Appeals specifically stated, 689 F.2d 94, 97 (6th Cir. 1982):

  The injunction was not issued in order to secure
  a RICO treble damages award. . . .

USACO surely does not aid plaintiffs here (in fact it suggests Section 1964(c) does not authorize creative equitable relief for Private RICO plaintiffs).

In a forthcoming article Professor Blakey (co-author of Basic Concepts) returns to his study of Private RICO and asserts (The RICO Civil Fraud Action in Context: Reflections on "Bennett v. Berg", [58] Notre Dame L.Rev. [237], [329]):

  It is difficult to see how a court could conclude
  that RICO does not provide equitable relief for
  private parties. . . . Section 1964 ought to be
  read as authorizing both governmental and private
  suits to obtain equitable relief. To the degree
  that any ambiguity might be thought to exist in
  the choice of language, the liberal construction
  clause and the remedial purpose of the statute
  come down on the side of finding private suits to
  be authorized and that full relief can be
  granted. No satisfactory rationale can be
  offered, in short, to explain why a court ought
  to feel itself circumscribed in doing full
  justice for a victim under RICO.

But what is apparently invisible to the academic eye is readily discernible by this Court's: For better or worse, current Supreme Court doctrine sharply limits the implication of rights of action or remedies where Congress has not provided them. As Professor Blakey quietly admits, the issue here is really one of finding a congressional implication where there is no explicit congressional declaration — and the Supreme Court's guidelines for directing that judicial enterprise provide a mandate, not only a "satisfactory rationale," for not vivifying Professor Blakey's theories.

In Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 246, 62 L.Ed.2d 146 (1979) the Supreme Court said:

  [I]t is an elemental canon of statutory
  construction that where a statute expressly
  provides a particular remedy or remedies, a court
  must be chary of reading others into it.

Accord, Touche Ross & Co. v. Redington, 442 U.S. 560, 571-74, 99 S.Ct. 2479, 2486-88, 61 L.Ed.2d 82 (1979). In reaffirming the same principle in Middlesex County Sewerage Authority v. National Sea Clammers Ass'n, 453 U.S. 1, 14-15, 101 S.Ct. 2615, 2623-24, 69 L.Ed.2d 435 (1981), the Supreme Court taught a court may read additional judicial remedies into "elaborate [statutory] enforcement provisions" only where "strong indicia of a contrary congressional intent" negate the implication "Congress provided precisely the remedies it considered appropriate."

In the case of Private RICO there are no "strong indicia" — in the structure of Section 1964, in its legislative history, in the absence of explicit language of exclusivity in subsection (c), or in any combination of those elements — of Congress' intent to infer private equitable remedies under RICO. In fact the evidence points precisely in the opposite direction. See Sea Clammers, 453 U.S. at 17-18, 101 S.Ct. at 2624-25. Contrast the circumstance in Herman & MacLean v. Huddleston, ___ U.S. ___, ___ — ___, 103 S.Ct. 683, 686-92, 74 L.Ed.2d 548 (1983), where the Supreme Court found indications of a specific congressional intent to cumulate remedies available under federal securities laws. Count II must be dismissed.

Count III: State Law Damages

Count III advances a state law fraud claim for compensatory and punitive damages. Under United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966) this Court has the constitutional power to hear nonfederal claims between federal action parties so long as both federal and nonfederal claims arise from a "common nucleus of operative fact." Actual exercise of that power, however, is a matter of this Court's discretion. Id. at 726, 86 S.Ct. at 1139.

Here the state law fraud claims clearly derive from the same "nucleus of operative fact" that gives rise to plaintiffs' RICO damages claims. Moreover the factors involved in the exercise of this Court's discretion — judicial economy, convenience and considerations of fairness to litigants (id.) — all point toward allowing the state fraud claims to be asserted pendent to plaintiffs' Private RICO damages claims.

Count IV. State Law Injunctive Relief

Complaint Count IV's prayer for relief repeats the prayer for RICO injunctive relief under Count II. Yet plaintiffs have identified no state law authority for ordering divestiture of SBI's security interest in the Restaurant. Indeed Count IV on the whole (¶ 21) seems aimed at future action by SBI: possible sale of the Restaurant.

On the latter score, plaintiffs simply assert (id.), without any supporting facts, "no adequate remedy at law exists" for their possible loss of the Restaurant. To the contrary, the Complaint itself confirms damages is an adequate remedy.*fn23 Although possible availability of legal remedies may not bar the granting of divestiture or other equitable remedies to the United States under Section 1964(a), United States v. Cappetto, 502 F.2d 1351, 1358-59 (7th Cir. 1974), cert. denied, 420 U.S. 925, 95 S.Ct. 1121, 43 L.Ed.2d 395 (1975), that does not extend to the state equitable claims. Consequently, on both the divestiture prayer and the prayer for state law injunctive relief, Count IV as pleaded is insufficient.

Conclusion

In summary:

    1. Counts I and III are dismissed as to
  defendant Sharma, but stand as to all other named
  defendants.

    2. Counts II and IV are dismissed in their
  entirety.

By its terms the December 6, 1982 TRO has remained in effect as to SBI pending issuance of this opinion. Because this Court has concluded Section 1964(c) does not provide private RICO plaintiffs equitable remedies, the TRO will be treated as having expired at 5 p.m. today.*fn24 Moving defendants are ordered to answer the Complaint on or before February 22, 1983.


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