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DAVIS v. SMITH

December 10, 1985

WILLIAM B. DAVIS, JAMES D. DAVIS, AND ROBERT P. DAVIS, PLAINTIFFS,
v.
COLIN SMITH, RONALD SCHILLER AND MORRIS D. KRUMHORN, DEFENDANTS.



The opinion of the court was delivered by: Nordberg, District Judge.

MEMORANDUM OPINION AND ORDER

This matter is before the court upon defendants Krumhorn and Smith's motion to dismiss. For the reasons hereinafter stated, defendants' motion is denied. In 1980 plaintiffs filed a five-count complaint against K & S Commodities, Inc. ("K & S"), alleging violations of the fraud provisions of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 6(b) (Count I), common law fraud (Count II), negligence (Count III), violation of fiduciary duty (Count IV) and breach of contract (Count V) (Case No. 80 C 4004). The bulk of the complaint alleged a fraudulent scheme wherein plaintiffs were told they could continue trading commodity futures contracts even though their accounts were undermargined and in a deficit position. Plaintiffs further alleged that, suddenly, a short time later, they were told that their accounts were frozen and all they could do was remove both sides of their "spread" transactions. As a result, plaintiffs suffered great losses when they were forced to liquidate their accounts. A motion to dismiss the action for failure to state a fraud under the CEA was denied by Chief Judge McGarr on February 25, 1981. The case was subsequently transferred to this court. Matters proceeded with various rulings on non-dispositive pre-trial matters made by this court.

Then, in July of 1984, plaintiffs filed a complaint under the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1961-1968 (1984) ("RICO"), based upon the same facts alleged in their 1980 complaint against K & S. Plaintiffs named Colin Smith, an account executive at K & S, Donald Schiller, secretary of K & S, and Morris Krumhorn, chief operating officer of K & S, as defendants (Case No. 84 C 6009). Plaintiff's RICO claim was found to be related to plaintiffs' earlier filed complaint and is now the subject of defendants' motion to dismiss. Defendants claim that plaintiffs' RICO claim must be dismissed because RICO does not extend to a violation of the CEA and the claim is barred by the statute of limitations.

Applicability of RICO to Commodities Fraud

Defendants' first objection, that RICO does not extend to a violation of the CEA, does not call for dismissal of the complaint. Paragraphs 1-24 of the complaint describe acts of mail and wire fraud sufficient to satisfy the statutory requirements of RICO. The law is clear that a RICO claim may be predicated upon a claim of nearly any type of fraud. Haroco v. American National Bank and Trust Co. of Chicago, 747 F.2d 384 (7th Cir. 1984) aff'd, ___ U.S. ___, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) (per curiam). See also Sedima, S.P.R.L., v. Imrex Co., Inc., ___ U.S. ___, 105 S.Ct. 3275, 3287, 87 L.Ed.2d 346 (1985); Schacht v. Brown, 711 F.2d 1343 (7th Cir.) cert. denied, 464 U.S. 1002, 104 S.Ct. 508, 78 L.Ed.2d 698 (1983). The mail and wire fraud statutes, violations of which satisfy the "pattern of racketeering activity" of RICO, 18 U.S.C. § 1961(1) and (5), also prohibit "any scheme or artifice to defraud." 18 U.S.C. § 1341, 1343 (1984).*fn1 Simply because the fraud alleged in the instant case involves a claim of fraud in the sale of commodity futures contracts does not mean that RICO cannot be invoked.*fn2 In fact, Taylor v. Bear Stearns & Co., 572 F. Supp. 667 (N.D.Ga. 1983), cited by defendants in support of their position, also indicates that a RICO claim may exist for fraud in the sale of commodities futures contracts as long as the acts of fraud are plead with sufficient particularity. Id. at 683.

In the instant case, various paragraphs of the complaint allege acts of mail and wire fraud. Paragraphs 18, 19 and 21 describe use of the mails and telephone in furtherance of the alleged scheme to defraud. Paragraph 18 alleges that plaintiff William Davis and defendant Krumhorn had a telephone conversation on February 27, 1980 wherein Krumhorn, without mentioning margin requirements, asked Davis to provide Krumhorn a promissory note in the amount of $60,000. Paragraph 19 alleges that as a result of that conversation, Davis sent Krumhorn the requested note via United States mail. Paragraph 21 alleges that defendant Schiller telephoned Davis on or about March 25, 1980, informing him that his account was frozen and plaintiffs would only be allowed to remove both sides of a "spread" transaction.

Pleading Fraud with Particularity

These paragraphs also demonstrate that defendants' further objection that plaintiffs have not plead fraud with sufficient particularity in accordance with Fed.R.Civ.P. 9(b), is without merit. The paragraphs adequately allege the facts upon which plaintiffs base their claim of fraud and set forth the facts with sufficient particularity so as to allow defendants to frame a responsive pleading. 5 Wright & Miller, Federal Practice and Procedure §§ 1297-1298 (1969). See Sutliff v. Donovan Companies, Inc., 727 F.2d 648, 654 (7th Cir. 1984); Schact v. Brown, 711 F.2d 1343, 1352 n. 7 (7th Cir.), cert. denied, 464 U.S. 1002, 104 S.Ct. 508, 78 L.Ed.2d 698 (1983). These paragraphs, alleging use of the mails and wire in perpetration of the alleged fraud, sufficiently describe the pattern of racketeering required by RICO.

Statute of Limitations Applicable to RICO

Defendants next claim that, even assuming plaintiffs have a valid RICO claim, it is barred by the statute of limitations. The RICO statute contains no specific limitations period. Traditionally, where a federal statute contains no specific statute of limitations, the federal courts have looked to the most appropriate limitations period provided by state law. Johnson v. Railway Express Agency, 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295 (1975); Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985). The Seventh Circuit has stated that the applicable limitations period is that which a court of the state where the federal court sits would apply had the action been brought there. Beard v. Robinson, 563 F.2d 331, 334 (7th Cir. 1977), cert. denied, 438 U.S. 907, 98 S.Ct. 3125, 57 L.Ed.2d 1149 (1978); see Burnett v. Grattan, 468 U.S. 42, 104 S.Ct. 2924, 82 L.Ed.2d 36 (1984).*fn3 State limitations periods will not be applied, however, if their application would be inconsistent with the policies underlying the federal cause of action. Movement For Opportunity, Etc. v. General Motors, 622 F.2d 1235 (7th Cir. 1980). This final consideration emphasizes "the predominance of the federal interest" in the borrowing process. Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 1943, 85 L.Ed.2d 254 (1985).

The parties have suggested three different limitations periods to apply to this cause of action. Defendants argue that plaintiffs' claim is based on a violation of the CEA and therefore the CEA's statute of limitations must be applied. Since the antifraud provisions of the CEA do not specify any limitation period, defendants suggest that the Illinois three-year limitations period governing securities actions, Ill.Rev.Stat. ch. 121 1/2, § 137.13(D), is most analogous to the rights asserted in plaintiffs' claim. Alternatively, defendants argue that the two-year Illinois statute governing statutory penalties, Ill.Rev.Stat. ch. 110, § 13-202, should be applied. Defendants reason that, since RICO provides for treble damages and such damages are deemed a penalty under Illinois law, this two-year limitations period would also be appropriate. Plaintiffs, on the other hand, maintain that Illinois' five-year statute for common-law fraud, Ill.Rev.Stat. ch. 110, § 13-205, should govern their RICO claim.

The various state limitations periods suggested by the parties illustrate the difficulty in determining the proper limitations period for a civil action under RICO.*fn4 RICO provides a federal remedy in addition to existing state remedies, and proscribes a broad range of conduct, thus rendering it difficult to pidgeon-hole the statute into any one state limitations period. Recently, in Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985), the Supreme Court was confronted by an analogous problem: determining a statute of limitations for lawsuits under 42 U.S.C. § 1983. Like RICO, § 1983 provides a federal forum for injuries resulting from a broad spectrum of conduct, and "almost every . . . claim can be favorably analogized to more than one of the ancient common-law forms of action, each of which may be governed by a different statute of limitations." Wilson at 1945. The Wilson court outlined its basic considerations when determining the appropriate statute of limitations for a § 1983 claim:

  [1] We must first consider whether state law or
    federal law governs characterization of [the] claim
    for statute of limitation purposes. . . . [This] is
    derived from the elements of the cause of action
    and Congress' purpose in providing it. . . .
  [2] If federal law applies, we must next decide
    whether all ยง 1983 claims should be characterized
    in the same way, or whether they should be
    evaluated differently, depending on the varying
    factual ...

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