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Haroco Inc. v. American National Bank and Trust Co.

*fn*: October 19, 1984.

HAROCO, INC., ET AL., PLAINTIFFS-APPELLANTS,
v.
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, WALTER E. HELLER INTERNATIONAL CORPORATION, & RONALD J. GRAYHECK, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 1618 -- Bernard Decker, Judge.

Author: Cudahy

Before BAUER and CUDAHY, Circuit Judges, and KELLAM, Senior District Judge.*fn**

CUDAHY, Circuit Judge.

This appeal presents several issues involving civil claims under the federal Racketeer Influenced and Corrupt Organizations ("RICO") statute. 18 U.S.C. §§ 1961-1968. The central issue concerns the type of injury a private civil plaintiff must allege to support a RICO claim under 18 U.S.C. § 1964(c). We must also consider several questions involving the RICO provisions requiring that a "person" conduct or participate in the conduct of the affairs of an "enterprise" through a pattern of racketeering activity, as those terms are defined in RICO. 18 U.S.C. § 1962(c). We affirm in part and reverse in part.

I

This is an appeal from the district court's dismissal for failure to state a claim. We shall therefore treat all allegations in the complaint as true and view them in the light most favorable to plaintiffs. The case arises from loans made by defendant American National Bank & Trust Company of Chicago ("ANB") to plaintiffs. Plaintiffs are several businesses, Haroco, Inc., Roman Ceramics, Inc., California Originals, Inc. and Mike Wayne Distilled Products Co. Haroco independently and together with other plaintiffs borrowed several million dollars from ANB between 1979 and 1981. Each loan agreement provided that the rate of interest would be "one per cent over the bank's prime rate," and the prime rate was defined as the "rate of interest charged by the bank to its largest and most creditworthy commercial borrowers for 90-day unsecured commercial loans." The defendants, in addition to ANB, are Ronald J. Grayheck, who is an officer and director of ANB, and Walter E. Heller International Corporation ("Heller International"), which is the parent company of ANB.*fn1

Plaintiffs brought this action in March 1983 alleging that defendants had defrauded them in the calculation of the prime rate which determined their own variable interest payments. The only alleged injuries were excessive interest charges resulting from defendants' calculation of the prime rate. Plaintiffs included in their complaint three state law causes of action and two counts based on alleged violations of the federal Racketeer Influenced and Corrupt Organizations ("RICO") provisions in 18 U.S.C. §§ 1961-1968.*fn2 As we shall explain in more detail below, plaintiffs' RICO claims were predicated on defendants' use of the mails in furtherance ofthe alleged scheme to defraud plaintiffs by overstating the prime interest rate. Count I of the amended complaint alleged that defendant ANB violated 18 U.S.C. § 1962(c) by conducting ANB's and Heller International's affairs through a pattern of racketeering activity. Count II alleged that defendants Heller International and Grayheck violated section 1962(c) by conducting ANB's affairs through a pattern of racketeering activity.

Defendants moved on three principal grounds to dismiss the RICO counts. First, they argued that plaintiffs failed to allege the requisite causal relationship between their injuries and the RICO violations. Second, defendants argued that plaintiffs failed to allege the requisite relationships between "persons" and the "enterprises," the affairs of which were allegedly conducted through patterns of racketeering activity. Third, defendants argued that plaintiffs had not pleaded the predicate acts of mail fraud with the necessary particularity.

The district court concluded that the plaintiffs had failed to state claims under RICO because they did not allege that they had suffered any injury by reason of a RICO violation in addition to the injuries caused by the alleged mail fraud. The district court held "that a plaintiff's injury to be cognizable under RICO must be caused by a RICO violation and not simply by the commission of predicate offenses, such as acts of mail fraud." Haroco, Inc. v. American National Bank & Trust Co., 577 F. Supp. 111, 114 (N.D. Ill. 1983). The district court therefore dismissed plaintiffs' RICO claims without reaching defendants' other arguments. Because there was no other ground for federal jurisdiction, the district court also dismissed the remaining pendent state law claims.

II

Before proceeding to the specific issues raised on this appeal, we must first sketch RICO's broad civil provisions. This court recently said that the civil RICO provisions are "constructed on the model of a treasure hunt." Sutliff, Inc. v. Donovan Companies, 727 F.2d 648, 652 (7th Cir. 1984). We begin the hunt with 18 U.S.C. § 1964(c), which provides the private cause of action:

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.

The next step is to examine section 1962, which describes the prohibited conduct. In this case, the most relevant portion of the section provides:

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.

18 U.S.C. § 1962(c). We must next turn to section 1961, which provides special statutory definitions for the key terms of section 1962(c). "Racketeering activity" is denied in section 1961(1) in terms of a long list of state and federal crimes, including mail fraud, 18 U.S.C. § 1341. A person commits mail fraud by using the mails for the purpose of executing a scheme or artifice to defraud. 18 U.S.C. § 1341; United States v. Wormick, 709 F.2d 454, 461-62 (7th Cir. 1983). A "pattern of racketeering activity," as required by section 1962(c), requires at least two acts of racketeering activity within a ten year period. 18 U.S.C. § 1961(5). The individual acts of racketeering activity, such as the alleged mail fraud in this case, are usually described as the "predicate offences."

RICO also defines "person" and "enterprise" very broadly. The term "person" includes "any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C. § 1961(3). The term "enterprise" includes "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4).

RICO's terms are obviously very broad. Because various fraud offenses are included in the definition of "racketeering activity," RICO claims (with their treble-damage provisions) have recently become attractive to many plaintiffs in commercial disputes that otherwise might involve only breach of contract, or securities or state law fraud claims. In cases involving allegations of commercial fraud, for example, it is often possible for a plaintiff to allege two acts of mail fraud, thus constituting a "pattern of racketeering activity," and to allege further that the defendant conducted the affairs of an "enterprise" through that pattern of racketeering activity in violation of section 1962(c). Whether RICO's broad terms should be read literally to permit RICO claims in instances of such "garden variety" fraud has recently been the subject of extended debates in the federal courts. The central issue in this case concerns the type of injury a plaintiff must allege to sustain a RICO claim.

III

The district court concluded that the plaintiffs were required to allege some injury in addition to injuries resulting from the predicate acts of racketeering. The courts imposing such a requirement have often referred to the additional injury as a "racketeering injury" or "rackeetering enterprise injury." We shall use the term "racketeering injury." The district focused on the requirement in 18 U.S.C. § 1964(c) that the RICO plaintiff be injured "by reason of a violation of section 1962," and interpreted that language to mean that allegations of injuries resulting only from the predicate acts of racketeering would not support a RICO claim.577 F. Supp. at 113-15. Because the only alleged injuries in this case were excessive interest payments resulting from the underlying fraud, the district court dismissed the RICO counts. The district court did not suggest what additional injuries might satisfy section 1964(c).

At the outset we should avoid confusion by distinguishing a "racketeering injury" from the elements of a RICO cause of action spelled out explicitly in the statute. There can be no doubt that to state a claim under RICO, a civil plaintiff must allege more than the occurrence of two predicate acts of racketeering from the list in section 1961. The elements of a civil RICO claim are set forth in sections 1964(c) and 1962. The plaintiff must allege an injury to "business or property," and that injury must be "by reason of a violation of section 1962." 18 U.S.C. § 1964(c). In this case we are concerned only with the conduct prohibited by subsection (c) in section 1962, and not with the provisions of subsections (a), (b) or (d). To allege a violation of section 1962(c), the plaintiff must allege that the defendant (1) was employed by or associated with (2) an enterprise engaged in, or the activites of which affected, interstate or foreign commerce, and (3) that the person conducted or participated in the conduct of the enterprise's affairs (4) through a pattern of racketeering activity. Alcorn County v. U.S. Interstate Supplies, Inc., 731 F.2d 1160, 1167-68 (5th Cir. 1984); Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S. Ct. 1280, 79 L. Ed. 2d 684 (1984).

The "racketeering injury" requirement imposed by the district court here goes farther than this elementary exposition of RICO. The district court required a special kind of injury for RICO claims. That "racketeering injury" is presumably something peculiar to RICO, although the district court here did not explain what the requirement is.

Whether a claim under section 1964(c) requires a reacketeering injury has recently been one of the most hotly disputed RICO issues in the federal courts. The district courts in this circuit have disagreed on the issue,*fn3 and district courts in other circuits are also divided.*fn4 Although we have not tried to count cases, there does not appear to be a clear weight of authority at the district court level either for or against the racketeering injury requirement.

Among the courts of appeals, the situation is more complicated. In Schacht v. Brown, 711 F.2d 1343 (7th Cir.), cert. denied, 464 U.S. 1002, 104 S. Ct. 508, 509, 78 L. Ed. 2d 698, 104 S. Ct. 508 (1983), the leading Seventh Circuit case on civil RICO, we rejected several arguments which are closely related to the racketeering injury question. After oral argument in this case, the Second Circuit issued three decisions which, together, amount to an en banc ruling by the Second Circuit in support of some sort of racketeering injury requirement. Sedima, S.P.R.L. v. Imrex Co., No. 83-7965 (2d Cir. July 2, 1984); Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir. 1984); Furman v. Cirrito, 741 F.2d 524 (2d Cir. 1984).*fn5 In addition, several recent decisions by this and other courts assume that injuries resulting from the predicate acts of racketeering satisfy RICO's requirements. Sutliff, Inc. v. Donovan Companies, supra, 727 F.2d at 653-54; Alcorn County v. U.S. Interstate Supplies, Inc., supra, 731 F.2d at 1169; Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1288 (7th Cir. 1983); Bennett v. Berg, 685 F.2d 1053, 1058-59 (8th Cir. 1982), aff'd en banc, 710 F.2d 1361, cert. denied, 464 U.S. 1008, 104 S. Ct. 527, 78 L. Ed. 2d 710 (1983).*fn6

Courts on both sides of the racketeering injury dispute have claimed that they are merely following the "plain" meaning of section 1964(c). Compare Bankers Trust Co. v. Rhoades, supra, slip op. at 5619 (plain meaning requires a distinct RICO injury), with Furman v. Cirrito, supra, slip op. at 11 (language is clear and does not require racketeering injury). We therefore suspect that we shall have to do more than stare at the language of section 1964(c) to decide this issue.

The initial hurdle for proponents of the racketeering injury is merely to define it, for "a racketeering enterprise injury is a slippery concept whose definition has eluded even those courts professing to recognize it," Alexander Grant & Co. v. Tiffany Industries, supra, slip op. at 10. Neither the district court nor the defendants in their brief have made any effort to define the requirement, but they are not alone in this respect. Many district courts have imposed on RICO plaintiffs a racketeering injury requirement without explaining what the requirement is. See, e.g., Hudson v. Larouche, 579 F. Supp. 623, 630 (S.D.N.Y. 1983); Furman v. Cirrito, 578 F. Supp. 1535, 1539-41 (S.D.N.Y. 1984), aff'd, No. 84-7113 (2d Cir. July 27, 1984); King v. Lasher, 572 F. Supp. 1377, 1382 (S.D.N.Y. 1983); Guerrero v. Katzen, 571 F. Supp. 714, 718-19 (D.D.C. 1983); Barker v. Underwriters at Lloyd's, 564 F. Supp. 352, 358 (E.D. Mich. 1983). Those district courts which have rejected a racketeering injury requirement have often remarked on this lack of explanation and the difficulty of definition as major reasons for rejecting it. E.g., In re Catanella, 583 F. Supp. 1388, 1436,-37 (E.D. Pa. 1984).

Instead of defining a racketeering enterprise injury, at least two districts have refused to do so, insisting only that they would know a racketeering enterprise injury when they saw one. Williamette Savings & Loan v. Blake & Neal Finance Co., 577 F. Supp. 1415, 1430 (D. Ore. 1984) (citing Jacobellis v. Ohio, 378 U.S. 184, 197, 12 L. Ed. 2d 793, 84 S. Ct. 1676 (1964) (Stewart, J., concurring)); Waste Recovery Corp. v. Mahler, 566 F. Supp. 1466, 1468-69 (S.D.N.Y. 1983) (citing Jacobellis v. Ohio, supra).

The Second Circuit's recent trilogy of decisions represents the most comprehensive effort to date to define and justify the racketeering injury requirement, and we shall deal with that definition here. As we shall explain in more detail below, the Second Circuit's new definition of the racketeering injury requirement appears to be essentially an amalgamation of proposed limits on RICO which we rejected in Schacht v. Brown, supra, as contrary to the language and purpose of RICO. We therefore view Schacht as controlling in this case; we could not follow the Second Circuit without essentially overruling Schacht.

We must examine in some detail both the precise holdings and the mode of statutory interpretation adopted in Schacht. The plaintiffs there alleged that the defendants had engaged in an elaborate fraudulent scheme involving the reorganization of an insolvent insurance company. According to the complaint, the defendants had defrauded the state director of insurance by concealing the extent of the insolvency and by drawing away the company's more profitable business for their own benefit through a reorganization scheme. The defendants allegedly convinced the state director to permit the insolvent company to continue writing unprofitable insurance, thus leading to the further dissipation of the company's remaining assets. 711 F.2d at 1345-46. The company's losses from the fraudulent scheme were allegedly substantial enough to have injured the company's policyholders and creditors in addition to its shareholders. 711 F.2d at 1348-49.

This court upheld the RICO counts in Schacht against numerous challenges. The defendants' primary attack was that Congress did not intend to apply RICO to "garden variety" business fraud or securities cases. Our treatment of that challenge in Schacht sets the tone for our analysis of RICO statutory issues here. We said there:

We agree that the civil sanctions provided under RICO are dramatic, and will have a vast impact upon the federal-state division of substantive responsibility for redressing illegal conduct, but, like most courts who have considered this issue, we believe that such dramatic consequences are necessary incidents of the deliberately broad swath Congress chose to cut in order to reach the evil it sought; we are therefore without authority to restrict the application of the statute.

711 F.2d at 1353. Our approach to RICO in Schacht was based heavily on the Supreme Court's opinion in United States v. Turkette, 452 U.S. 576, 69 L. Ed. 2d 246, ...


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