United States District Court, Northern District of Illinois, E.D
July 29, 1985
NORTHERN TRUST BANK/O'HARE, N.A. AS TRUSTEE, ETC., PLAINTIFF,
INRYCO, INC., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Northern Trust Bank/O'Hare, N.A. as Trustee under Trust No.
74 L 214 ("Trustee") charges Inryco, Inc. ("Inryco") and others
violated 18 U.S.C. § 1964(c) and (d) (part of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"),
18 U.S.C. § 1961-1968*fn1), as well as state law, when they participated
in a construction contract kickback scheme. Inryco now moves
under Fed.R.Civ.P. ("Rule") 9(b), 12(b)(1) and 12(b)(6) to be
dismissed from the Complaint. For the reasons stated in this
memorandum opinion and order, the motion is granted.
On October 22, 1979 Trustee contracted with Inryco for
construction of a warehouse addition (the "Project") in
Franklin Park, Illinois (Complaint ¶ 11(a)*fn3). Inryco
designated its employee Jerry Ranke ("Ranke") as Senior Project
Manager in charge of construction (¶ 11(b)). Ranke's duties
included soliciting bids from subcontractors and awarding
subcontracts (¶ 3(b)).
Ranke and Inryco hired Century Concrete Construction Company
act as concrete subcontractor for the Project (¶ 11(c)). Ranke
then worked out a kickback scheme with Century and its
President Nat D'Angelo ("D'Angelo"). That scheme was
implemented through a number of payments:
1. On November 19, 1979 Ranke issued a phony
work order to Century in the amount of $35,049
(¶ 14(a)). Inryco released funds in that amount to
Century, but Century never performed the specified
work. On December 20 Century issued a $35,049 check
to Ranke under the alias Tom Mann. Ranke converted
the funds to his own use through a bank account he
had established under the Mann name at First Bank
and Trust Company of Palatine ("Palatine Bank") (¶¶
2. Century and D'Angelo later funneled three
more kickbacks to Ranke (¶ 15):
(a) July 1, 1980 — $190,000(b)
October 27, 1980 — 20,840(c)
October 27, 1980 — 18,939
Each of those payments also took the form of a
Century check made out to Mann and deposited in
the Palatine Bank account (id.).
Century did not perform its work in accordance with the
Project specifications (¶ 19(b)). Much of the concrete work was
performed in an unworkmanlike manner (id.). Trustee charges
Ranke is responsible for the defects because he either failed
adequately to supervise the work or knowingly permitted Century
to perform it in an unsatisfactory manner. Trustee alleges no
In support of its motion Inryco asserts a congeries of flaws
in the Complaint:
1. It fails to allege sufficient facts to permit
a determination whether Trustee is the "real party
in interest" (Rule 17(a)) and is hence the proper
party to prosecute this action.
2. It alleges injuries not proximately caused by
the claimed racketeering activity.
3. It improperly names Inryco as a RICO
defendant, because Inryco was a victim of the
4. It fails to allege a proper "enterprise."
5. It fails properly to allege Inryco conspired
to violate RICO.
6. It fails to set out the alleged fraudulent
activity with the specificity required by Rule
This opinion will not treat with the first of those issues,
which is the subject of no more than a footnote in the current
briefing (Inryco Mem. 3 n. *) and plainly requires more
On the other hand, the Complaint's
deficient allegations of a "pattern" of racketeering — which
were not discussed at all in the parties' briefs*fn5
dispositive of Inryco's motion and mandate Inryco's dismissal
from the Complaint.*fn6
grounds will also be discussed briefly, against the possibility
Trustee may be able to cure the "pattern" defect in the
Lack of a Pattern of Racketeering Activity
Section 1962(c) renders unlawful the conduct, "though a
pattern of racketeering activity," of the affairs of an
enterprise engaged in, or whose activities affect, interstate
commerce. Sections 1962(a) and (b) define other RICO-prohibited
activities, each of which also shares the common thread of a
"pattern of racketeering activity." Section 1961(1) defines
"racketeering activity" as any of a large number of specified
illegal acts, including "any act which is indictable
under . . . [18 U.S.C.] section 1341 (relating to mail fraud)."
Finally, Section 1961(5) is the only RICO provision that speaks
at all to the concept of a "pattern":
"[P]attern of racketeering" requires at least two
acts of racketeering activity, one of which
occurred after the effective date of this chapter
and the last of which occurred within ten years
(excluding any period of imprisonment) after the
commission of a prior act of racketeering
At least until recently, commentators and courts have
differed in their readings of "pattern" for RICO purposes. Some
courts have taken the position that any two acts of
racketeering by the same enterprise, no matter how unrelated,
establish the requisite pattern. United States v. Weisman,
624 F.2d 1118
, 1122-23 (2d Cir.), cert. denied, 449 U.S. 871
S.Ct. 209, 66 L.Ed.2d 91 (1980); United States v. Bright,
630 F.2d 804
, 830 n. 47 (5th Cir. 1980). By contrast other courts,
including our own Court of Appeals, have applied some such
requirement of relatedness as this (United States v. Stofsky,
409 F. Supp. 609, 614 (S.D.N.Y. 1973), aff'd on other grounds,
527 F.2d 237
(2d Cir. 1975), cert. denied, 429 U.S. 819
S.Ct. 65, 50 L.Ed.2d 80 (1976)):
[R]acketeering acts must have been connected with
each other by some common scheme, plan or motive
so as to constitute a pattern and not simply a
series of disconnected acts.
See United States v. Starnes, 644 F.2d 673
, 677-78 (7th Cir.
1981), which held acts taken in furtherance of a single
criminal end are sufficiently related to satisfy the "pattern"
requirement. Starnes, 644 F.2d at 678, like the same court's
earlier decision in United States v. Weatherspoon,
581 F.2d 595
, 601-02 (7th Cir. 1978), rejected the contention that
constituent acts do not form a pattern unless they are
performed in the course of separate criminal events.
In logical terms, such cases as Starnes and Weatherspoon were
only partly right in fleshing out the concept of "pattern."
True enough, "pattern" connotes similarity, hence the cases'
proper emphasis on relatedness of the constituent acts. But
"pattern" also connotes a multiplicity of events: Surely the
continuity inherent in the term presumes repeated criminal
activity, not merely repeated acts to carry out the same
criminal activity. It places a real strain on the language to
speak of a single fraudulent effort, implemented by several
fraudulent acts, as a "pattern of racketeering activity."
United States v. Moeller, 402 F. Supp. 49, 57-58 (D.Conn.
1975) (emphasis in original) made precisely that point in
urging both logic and RICO's legislative history require a
showing of similar racketeering acts occurring in different
Three issues arise in considering whether Count 8
states an offense. The first is whether the
statutory requirement of a "pattern of
racketeering activity" is adequately alleged by an
allegation of two acts that occurred in the course
of a single criminal episode.
Were the question open, I would have seriously
doubted whether the word "pattern" as used in
§ 1962(c) should be construed to mean two acts
occurring at the same place on the same day in the
course of the same criminal episode. While the
statutory definition makes clear that a pattern can
consist of only two acts, I would have thought the
common sense interpretation of the word "pattern"
implies acts occurring in different criminal
episodes, episodes that are at least somewhat
separated in time and place yet still sufficiently
related by purpose to demonstrate a continuity of
activity. I would further have thought that the
normal canon of narrowly construing penal statutes
points toward such an interpretation. Finally, I
would have thought the legislative history made
such an interpretation clear. Thus, the Senate
The concept of "pattern" is essential to the
operation of the statute. . . . The target of
Title IX is thus 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.
S.Rep. 91-617, 91st Cong., 1st Sess. 158.
It is difficult to see how the threat of continuing activity
stressed in the Senate Report could be established by a single
Moeller's analysis was mere dictum. District Judge Newman was
foreclosed from applying the rule he advocated because the
Court of Appeals for the Second Circuit, like our own Court of
Appeals, had previously ruled a pattern could be shown by acts
constituting a single criminal transaction. United States v.
Parness, 503 F.2d 430, 441-42 (2d Cir. 1974), cert. denied,
419 U.S. 1105, 95 S.Ct. 775, 42 L.Ed.2d 801 (1975). But Moeller has
now been vindicated, and such cases as Starnes and
Parness have been vitiated by the Supreme Court's opinion in
Sedima, S.P.R.L. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 87
L.Ed.2d 346 (1985).
To be sure, Sedima, 105 S.Ct. at 3285 n. 14 and 3287 also
spoke in dictum. But its message was both plain and deliberate:
Lower courts concerned about RICO's expansive potential would
be best advised to focus on the hitherto largely ignored
"pattern" concept. As Sedima, 105 S.Ct. at 3287 put it:
The "extraordinary" uses to which civil RICO has
been put appear to be primarily the result of the
breadth of the predicate offenses, in particular
the inclusion of wire, mail, and securities fraud,
and the failure of Congress and the courts to
develop a meaningful concept of "pattern."
And the flaw in other courts' prevalent approach to that
subject was their mistaken assumption that any two acts
automatically spell out a pattern. Note 14 of Sedima quoted the
selfsame language from the Senate Report as had Moeller, also
to stress that a "pattern" cannot be established without
"continuity plus relationship." And note 14 emphasized the
"continuity" point by stating more than once RICO is not aimed
at the isolated offense:
As many commentators have pointed out, the
definition of a "pattern of racketeering activity"
differs from the other provisions in § 1961 in that
it states that a pattern "requires at least two
acts of racketeering activity," § 1961(5) (emphasis
added), not that it "means" two such acts. The
implication is that while two acts are necessary,
they may not be sufficient. Indeed, in common
parlance two of anything do not generally form a
"pattern." The legislative history supports the
view that two isolated acts of racketeering
activity do not constitute a pattern. As the Senate
Report explained: "The target of [RICO] is thus 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." S.Rep. No. 91-617, p. 158 (1969)
(emphasis added). Similarly, the sponsor of the
Senate bill, after quoting this portion of the
Report, pointed out to his colleagues that "[t]he
term `pattern' itself requires the showing of a
relationship. . . . So, therefore, proof of two
acts of racketeering activity, without more, does
not establish a pattern. . . ." 116 Cong.Rec.
18940 (1970) (statement of Sen. McClellan). See
also id., at 35193 (statement of Rep. Poff) (RICO
"not aimed at the isolated offender"); House
Hearings, at 665. Significantly, in defining
"pattern" in a later provision of the same bill,
Congress was more enlightening: "criminal conduct
forms a pattern if it embraces criminal acts that
have the same or similar purposes, results,
participants, victims, or methods of commission, or
otherwise are interrelated by distinguishing
characteristics and are not isolated events."
18 U.S.C. § 3575(e). This language may be useful in
interpreting other sections of the Act. Cf.
Iannelli v. United States, 420 U.S. 770, 789, 95
S.Ct. 1284, 1295, 43 L.Ed.2d 616 (1975).
It is profitable to focus the analysis by a fresh look at
Weatherspoon in light of Sedima. In the former case, our Court
of Appeals properly rejected (581 F.2d at 601) defendant's
argument that "there was only one `act' of racketeering
activity because all of the mailings which formed the basis for
the mail fraud counts were in furtherance of a single scheme to
defraud." Weatherspoon parsed the statute and authorities to
hold (again properly) the five mailings in furtherance of that
single scheme, comprising five separate acts of mail fraud,
were also five acts of "racketeering activity" (id. at 601-02).
But it jumped the tracks when it elided the separate statutory
requirement of a "pattern" by simply equating multiple acts
with that requirement (id.):
As a consequence, she engaged in a "pattern of
racketeering activity" within the meaning of
18 U.S.C. § 1961(5), 1962(c) because she committed
two or more acts of "racketeering activity."
That non sequitur will no longer wash, in light of
Sedima's proper emphasis on "pattern" as an independent
component of a RICO claim under the plain language of the
Sedima thus clearly creates a whole new ballgame. With such
an unmistakable signal from the Supreme Court, this Court is no
longer obligated to follow contrary Court of Appeals opinions.
Although Trustee's "pattern" allegations satisfied the approach
taken in Starnes and Weatherspoon, they clearly fail to satisfy
Sedima's "continuity plus relationship" formulation. Complaint
¶ 10 states simply:
The pattern of racketeering activity in which
defendants engaged includes two or more acts
enumerated in 18 U.S.C. § 1961, including two or
more acts of mail fraud as hereinafter described.
Complaint ¶ 16 then specifies two mailings that were made in
connection with the Inryco-Century subcontract and the
kickbacks to Ranke. Both logic and Sedima compel the conclusion
that the two specified acts — Inryco's mailing the subcontract
to Century and Century's mailing a kickback check to Ranke —
fail to establish a "pattern of racketeering activity."
This Court is itself normally loath to indulge in dictum. But
in this case the prospect of Trustee's possible repleading
invites that treatment — and after all, in light of Sedima
this Court could scarcely find itself in more respectable
company. It merits observing that even if the three added
kickback payments alleged in Complaint ¶ 15 involved the use of
the mails, they still implemented the same fraudulent scheme as
the first two mailings — and the single scheme does not appear
to represent the necessary "pattern of racketeering activity."
That prospect however is for the future. For the present,
Inryco is plainly entitled to dismissal from Count I. Despite
that dismissal, this opinion continues to deal briefly with
other issues for the reasons already explained.
Section 1964(c) requires that a RICO plaintiff be injured "by
reason of" a violation of Section 1962. Haroco v. American
National Bank and Trust Co. of Chicago, 747 F.2d 384, 398 (7th
Cir. 1984), aff'd per curiam, ___ U.S. ___, 105 S.Ct. 3291, 87
L.Ed.2d 437 (1985) explained the proximate cause requirement
that language denotes:
This holding by no means renders superfluous the
requirement in section 1964(c) that the plaintiff
be injured "by reason of" a violation of section
1962. As we read this "by reason of" language, it
simply imposes a proximate cause requirement on
plaintiffs. The criminal conduct in violation of
section 1962 must, directly or indirectly, have
injured the plaintiff's business or property. A
defendant who violates section 1962 is not liable
for treble damages to everyone he might have
injured by other conduct, nor is the defendant
liable to those who have not been injured. This
causation requirement might not be subtle, elegant
or imaginative, but we believe it is based on a
straightforward reading of the statute as Congress
intended it to be read.
That reading was confirmed by the Supreme Court in
Sedima, 105 S.Ct. at 3286 n. 15, and in its Haroco affirmance,
105 S.Ct. at 3292.
Inryco argues the Complaint fails to indicate such a causal
nexus between the kickbacks and Century's faulty concrete work.
But on the current motion reasonable inferences must be drawn
from the Complaint in Trustee's favor, despite the anomaly of
ascribing to Inryco a scheme that by definition took dollars
out of its pocket.*fn7 And from a perspective most favorable
to Trustee, the realities of construction subcontracting
support an inference the fraud contributed to Century's poor
Inryco's profit as a general contractor depended directly on
its ability to obtain subcontracted work from competent
subcontractors for the lowest possible price. It is certainly
reasonable to assume — in the absence of unusual circumstances
such as bid-rigging (see n. 7) — Century's successful bid
represented a fair price for performing the concrete work
required by Trustee's specifications.*fn8 And if that is so,
Century's having kicked back over a quarter of a million
dollars to Ranke — a large sum whatever the size of the
project*fn9 — might well have depleted Century's funds to the
point where Century was unable to perform the concrete work
either completely or properly. If it is assumed Inryco knew of
the fraud, it must also be assumed it knew of that potential
impact on Trustee.
Inryco's Culpability (or Lack of It)
But because Trustee must now decide whether to reinsert
the only deep pocket among the defendants) into this lawsuit,
a further word is in order. Precisely the same
construction-world realities that — taken most favorably to
Trustee — support an inference of proximate causation also
militate against the possibility Inryco itself participated in
the fraud. After all, as n. 7 reflects:
1. Inryco's knowing acceptance of a padded bid
by Century would amount to its deliberately
handing over its profits to Century and Ranke
— surely a preposterous suggestion.
2. Inryco's knowing approval of kickbacks that
would render Century financially incapable of
workmanlike performance is equally remote. It is
Inryco, not the subcontractors, that is
contractually answerable to Trustee for any
deficiencies in the construction work.
In short, it is far more logical (as Inryco urges) that Inryco
was the principal victim rather than the perpetrator of the
fraud. If so, Inryco would hardly appear to be an appropriate
RICO defendant.*fn10 Haroco, 747 F.2d at 400-01, specifically
approving this Court's analysis in Parnes v. Heinold
Commodities, Inc., 548 F. Supp. 20, 23-24 (N.D.Ill. 1982).
In light of the current disposition on "pattern" grounds, no
opinion is expressed here as to the overall legal sufficiency
of Trustee's seeking to hold Inryco liable under RICO via
agency principles for Ranke's acts of fraud. Again, though, the
prospect of Trustee's repleading in an effort to reinstate a
claim against Inryco justifies a comment or two:
1. Respondeat superior is clearly an
insufficient basis for liability under RICO.
Parnes, 548 F. Supp. at 24 n. 9 is one of a number
of cases so holding; and see Haroco, 747 F.2d at
401. Indeed Trustee Mem. 4 specifically
2. Trustee's "ratification" allegations (¶ 18(d))
and "recklessness" allegations (¶¶ 12(b) and (c)
and 18(a) and (b)) are far too vague to support
either of the agency theories proposed by Trustee
(in an effort to retreat from its
It would unduly (and unnecessarily) lengthen this opinion to
engage in further analysis of Inryco's posture. Although other
matters could be adduced, enough has been said to indicate
Trustee and its counsel will be well advised to bear in mind
their obligations under Rule 11 before they opt to include
Inryco in an amended RICO complaint.*fn11
Count I's RICO allegations fail to state a cause of action
against Inryco. Accordingly Inryco must be dismissed from Count
I, and in the exercise of this Court's discretion it dismisses
Inryco from the pendent state law claims.*fn12 By definition
such dismissal is without prejudice, but Trustee is cautioned
to consider the caveats in this opinion.