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KAUSHAL v. STATE BANK OF INDIA

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 ...


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