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NORTHERN TRUST BANK/O'HARE v. INRYCO

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


July 29, 1985

NORTHERN TRUST BANK/O'HARE, N.A. AS TRUSTEE, ETC., PLAINTIFF,
v.
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.

Facts*fn2

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 ("Century") to 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") (¶¶
  12(a), 14(c)).

    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 other injury.

Inryco's Contentions

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
  fraud.

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
  9(b).

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 substantial treatment.
*fn4 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 — are dispositive of Inryco's motion and mandate Inryco's dismissal from the Complaint.*fn6 Inryco's other grounds will also be discussed briefly, against the possibility Trustee may be able to cure the "pattern" defect in the Complaint.

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
  activity.

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, 101 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, 97 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 criminal episodes:

  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
  Report explains:

    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.
    (Emphasis added).

It is difficult to see how the threat of continuing activity stressed in the Senate Report could be established by a single criminal episode.

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 statute.

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.

Proximate Causation

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 workmanship.

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 Inryco (perhaps 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
  acknowledges that.

    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
  no-respondeat-superior admission).

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

Conclusion

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.


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