Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 82 C 2803 & 82-3284--George N. Leighton, Judge.
Before WOOD, CUDAHY and FLAUM, Circuit Judges.
CUDAHY, Circuit Judge. These appeals concern events related to a 1981 corporate reorganization involving Peoples Energy Corporation, MidCon Corporation and their corporate subsidiaries. Plaintiffs, the City of Chicago and the County of Cook, brought a class action on behalf of gas consumers against the various corporate defendants, their officers and directors, and their independent auditor, Arthur Andersen & Co., alleging that defendants had violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968, ("RICO") by conducting the affairs at MidCon, Peoples Energy and their subsidiaries through a pattern of racketeering. Specifically, plaintiffs claim that Peoples Energy's two utility subsidiaries, People Gas Light and Coke Company and North Shore Gas Company, engaged in a scheme to defraud which began when those subsidiaries obtained rate increases between 1977 and 1980 on the basis of intentional misrepresentations that such increases were necessary to provide adequate and efficient utility service. Thereafter, plaintiffs allege, the utility subsidiaries diverted the revenues derived from the rate increases by paying excessive dividends to Peoples Energy, which invested the proceeds in nonutility subsidiaries. The scheme allegedly came to fruition in the 1981 reorganization, in which Peoples Energy divested the nonutility subsidiaries to MidCon. Plaintiffs also brought various pendent state claims.
While this suit was pending, a judgment was rendered in a state court action which also concerned the reorganization. Thereafter, the district court granted defendants' motions to dismiss the RICO claims, on the alternative grounds of collateral estoppel and failure to state a claim. The court also dismissed the state law claims on the basis of res judicata and collateral estoppel. Plaintiffs now appeal.
The district court's opinion dismissing plaintiffs' actions is reported at 574 F. Supp. 902 (N.D. Ill. 1983). For the convenience of the reader we reprint the district court's statement of facts in its entirety:
Before filing complaints in this court, the County of Cook and the City of Chicago were parties to two consolidated cases before Judge George J. Schaller of the Circuit Court of Cook County, Chancery Division. The proceedings in the state court commenced August 20, 1981 when several of the defendants in this action, Peoples Energy Corporation, MidCon Corporation, and Natural Gas Pipeline Company of America, filed a complaint against the Illinois Commerce Commission which sought, inter alia, an injunction against interference with a planned corporate reorganization. Peoples Energy proposed to transfer the common stock of its nonutility subsidiaries to a newly incorporated holding company, MidCon Corporation, in exchange for MidCon stock which was to be distributed to shareholders of Peoples Energy on a pro rata basis. Under the plan, Peoples Energy would continue to hold the common stock of its two public utility subsidiaries, The Peoples Gas Light and Coke Company and North Shore Gas Company. On September 3, 1981 the Illinois Commerce Commission filed a separate action against Peoples Energy, MidCon and Natural, as well as Peoples Gas Light and North Shore, seeking to enjoin the proposed reorganization; this suit eventually was consolidated with the already pending action in which the Commerce Commission was a defendant.
Cook County intervened in the state litigation on September 16, 1981 as a defendant to the affiliated corporations' suit for injunctive relief against interference with the reorganization by the Illinois Commerce Commission, and as a counterplaintiff seeking to enjoin the proposed Peoples reorganization. By this time, various other parties also had intervened in the proceedings as defendants and counterplaintiffs; among them were the State of Illinois, the Governor's Office of Consumer Service, an agency of the Illinois executive branch, Business and Professional People for the Public Interest, Inc., a not-for- profit corporation, and the South Austin Coalition Community Council, a not-for-profit community organization. In September and October 1981, Judge Schaller conducted a five-week hearing on the parties' cross motions for preliminary injunctive relief. On October 23, 1981, he issued a 54-page decision, granting a preliminary injunction to Peoples and its affiliates, and denying such relief to the Illinois Commerce Commission, Cook County, and the other intervenors. After obtaining the approval of shareholders, Peoples and its affiliates implemented the reorganization on November 30, 1981. According to plan, control of the nonutility subsidiaries was transferred to MidCon from Peoples Energy, the remaining corporate parent of the two public utility subsidiaries.
Cook County filed an amended counterclaim before Judge Schaller on February 4, 1982, seeking a declaratory judgment that the Peoples reorganization was void, and praying for a permanent injunction requiring the corporations involved in the reorganization to undo what they were attempting to accomplish. Thereafter, on April 27, 1982, Judge Schaller granted the City of Chicago leave to intervene as an additional defendant-counterplaintiff. The City's intervention was subject to various terms and conditions: Chicago was to be bound by all orders previously entered by the state court; it was not to raise new issues or add new parties; finally, it was not to interfere with the control of the litigation in a manner which promoted injustice or caused undue delay. In its counterclaim, the City, too, sought an order granting declaratory and injunctive relief reversing the Peoples reorganization transaction.
In their counterclaims, the City and the County alleged that the Peoples reorganization was an ill-conceived attempt to circumvent the jurisdiction of the Illinois Commerce Commission while the corporations involved deprived consumers of the benefits of assets properly belonging to rate base of the public utilities, People Gas and North Shore, by transferring those assets to MidCon. Cook County specifically alleged that excessive dividend payments extracted from the utility subsidiaries, combined with Peoples Energy's investment policy of investing these funds in its nonutility holdings, constituted an arrangement which facilitated the exchange of utility assets to MidCon when the reorganization took place. As a consequence of the reorganization, consumers were injured, both parties contended, by having to pay increased gas prices while receiving less reliable service. These core allegations were repeated in virtually every pleading filed by the other intervening parties.
After obtaining the preliminary injunction, the Peoples affiliates filed a motion on October 28, 1981 for permanent injunctive relief. Judge Schaller then set July 6, 1982 as the trial date for hearing on the merits all the various claims and counterclaims of the parties.
On May 6, 1982, before the trial before Judge Schaller, Cook County filed a complaint in this court, alleging as a basis of federal jurisdiction that defendants, the corporations involved in the reorganization, various of their officers, directors, and their accountant, violated RICO by effecting the reorganization through a concerted pattern of racketeering. The City of Chicago filed a virtually identical complaint on May 26, 1982. These two actions were consolidated by this court's order of June 11, 1982. The gravamen of the RICO allegations before this court is that the reorganization was the culmination of a scheme to defraud consumers of their right to receive adequate and efficient utility service at just and reasonable rates by transferring to MidCon assets that properly belonged to the utilities. The major steps in this scheme to defraud, which took place between 1977 to 1981, are alleged by plaintiffs to be that:
(1) Defendants caused the utility subsidiaries to pay excessive dividends to Peoples Energy.
(2) They then used Peoples Energy to invest these dividends in subsidiaries which were nonutilities.
(3) Meanwhile, defendants made misrepresentations to the Illinois Commerce Commission and to the public, stating that these dividends were not excessive and that their investment program would benefit the utility subsidiaries and their consumers.
(4) Defendants made plans to reorganize by transferring the nonutilities to a newly incorporated MidCon Corporation without disclosing those plans to the public until January 1981.
(5) Misrepresentations were made that the reorganization would not result in higher gas rates for the customers of Peoples Gas Light and North Shore and would have no adverse effect on the financial condition of either company.
(6) Finally, in late 1981, the scheme to defraud was consummated when the reorganization took place, leaving the nonutilities with a new corporate parent, MidCon, while North Shore and Peoples Gas Light remained subsidiaries of Peoples Energy. As a result of all the foregoing, plaintiffs allege, the utilities had become undercapitalized and the public, having been deprived of the benefits of assets generated by the utilities, has had to pay higher prices for less efficient utility services.
Plaintiffs further aver that defendants committed multiple acts of mail fraud, as prohibited by 18 U.S.C. § 1341, by using the United States mails in furtherance of their scheme to defraud. Included among these mailings were proxy statements, Form 10-K filings to the Securities and Exchange Commission, annual reports, press releases, transfers of assets, and various correspondence, including communications between officers and directors. Except for proxy statements issued by defendants when shareholder approval of the reorganization was sought, no mention of these mailings is made elsewhere in the complaint. The City and County allege that the proxy statements seeking shareholder approval of the reorganization were unconditionally certified by defendant Arthur Andersen & Co., the accountant of the corporate defendants, even though the statements determined dividends declared on common stock for MidCon on a different basis than dividends declared on common stock for Peoples. These inconsistent accounting methods, plaintiffs maintain, 'concealed the intentionally indirect transfer of assets from Peoples Gas Light and North Shore to MidCon.'
In addition to claiming that defendants' alleged misconduct violated RICO, the City of Chicago appended to its complaint Counts II through IV, seeking to impose an accounting and constructive trust on the corporations and their ...