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

December 10, 1985


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


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 § 1983 claims should be characterized
    in the same way, or whether they should be
    evaluated differently, depending on the varying
    factual circumstances and legal theories presented
    in each case. . . .

  [3] Finally, we must characterize the essence of the
    claim in the pending case, and decide which state
    statute provides the most appropriate limiting

Wilson at 1943. The Court held that since the thrust of a § 1983 claim was a violation of federal constitutional rights, federal law governed characterization of such claims for statute of limitations purposes. Id. at 1944. Noting the uncertainty engendered by this limitations issue, the Wilson Court held that a uniform limitations period within each state was necessary to promote the federal interests in "uniformity, certainty, and the minimization of unnecessary litigation." Id. at 1947. Accordingly, the Court held that § 1983 claims are best analogized to personal injury actions, and the state limitations periods for those actions should apply to all § 1983 claims. Id. at 1949.

Guided by the Wilson decision and the traditional borrowing practices of federal courts in limitations issues, this court concludes that of the three suggested limitations periods — Illinois Securities Law, statutory penalties, and fraud — the Illinois five-year statute of limitations for fraud is the most analogous to a RICO claim and should be uniformly adopted for all RICO cases.

Federal law governs the characterization of RICO claims for statute of limitations purposes. With its enactment of the RICO statute, Congress created a unique civil cause of action for plaintiffs who have been injured by RICO violations. Both the civil remedies and criminal penalties are defined by federal law.*fn5 The underlying considerations which led the Wilson Court to adopt a uniform characterization of § 1983 claims for limitations purposes likewise compel this court to adopt a uniform characterization of RICO claims. This court finds that RICO claims are most analogous to claims of fraud. Of the predicate offenses outlined in the statute, several relate directly to fraud or fraudulent activity.*fn6 The fact that fraud appears to be the predominant predicate offense in civil RICO claims further supports the uniform adoption of the Illinois limitations period for fraud in all RICO cases.*fn7 The Illinois limitations period for securities act violations is inappropriate for a uniform statute because, although arguably related to the case at hand, it is too limiting in its subject matter to serve as an appropriate time period for all RICO claims.

  In Electronic Relays (India) Pvt. Ltd. v. Pascente, 610 F. Supp. 648
 (N.D.Ill. 1985), the court, relying on the Supreme Court's
decision in Wilson v. Garcia, supra, held that the aspect of
civil RICO most emphasized in the statute's legislative history
is its treble damages provision. Because Illinois regards treble
damages as punitive in nature, the court held that the Illinois
two-year limitations period for punitive damages, Ill.Rev.Stat.
ch. 110, § 13-202, should apply to all RICO cases. Electronic
Relays, supra at 650-52. This reasoning was subsequently adopted
in Bolingbrook Properties II v. Irvin, No. 84 C 10480, slip op.
at 4 (N.D.III. Aug. 5, 1985) [Available on WESTLAW, DCTU

This court finds, however, that adoption of the Illinois approach to punitive damages will not necessarily provide district courts with the proper uniform limitations period for RICO claims. Selecting a limitations period in accordance with the state's view of the nature of the remedy instead of the nature of the cause of action could frustrate the very purposes of RICO.*fn9 Congress emphasized that "RICO is to be liberally construed to effectuate its remedial purposes." Title IX, § 904, 84 Stat. 947. In this court's view, adoption of this limitations period does not give sufficient consideration to the elements of a RICO action and the time frame in which it may take a plaintiff to discover them. The crux of the majority of civil RICO cases appears to be a type of fraud, which is not necessarily discernable within a shorter limitations period.*fn10 RICO's remedial purposes can be more effectively accommodated by the five-year fraud statute of limitations than the shorter two-year provision addressing civil penalties.*fn11 Therefore, this court holds that Illinois' statute of limitations governing fraud is the most appropriate limitations period for all civil RICO claims.

The court's adoption of the Illinois fraud statute is supported by the Wilson decision, as well as the facts of this case and the traditional analysis governing the borrowing of state limitations periods for federal causes of action. The plaintiffs' complaint essentially alleges that they were lulled into continued trading on their account despite the fact that it was under-margined. Plaintiffs describe acts taken by the defendants in furtherance of this goal and characterize such actions as a scheme to defraud. Defendants correctly note that, in actions for fraud under the CEA, courts have applied the three-year statute of limitations provided by Illinois securities law as these allegations are similar to a claim of fraud in the sale of securities. See Shelley v. Noffsinger, 511 F. Supp. 687 (N.D.Ill. 1981); Anvil Investors Ltd. Partnership v. Thornhill Condominiums, Ltd., 85 Ill. App.3d 1108, 41 Ill.Dec. 147, 407 N.E.2d 645 (1st Dist. 1980). Since the claim is related to a securities claim, an Illinois court would probably choose the securities law statute of limitations over the two-year statute of limitations governing statutory penalties, Ill.Rev.Stat. ch. 110, § 13-202. Although the limitations period governing statutory penalties has been applied in cases where treble damages are provided for, as in this case, the policies behind the Illinois securities law would seem to prevail in a case of this nature over the policies underlying the statutory penalty limitations period. See Superior Laundry & Linen Supply Co. v. Edmanson-Bock Caterers, Inc., 11 Ill. App.2d 132, 136 N.E.2d 610 (1st Dist. 1956).

However, even if this court determined that an Illinois court would apply the Illinois securities law limitation period in an analogous case, this would not settle the matter. The court then must consider whether application of the state limitations period would be inconsistent with the policies underlying the federal cause of action. This court concludes that application of the statute of limitations for securities claims would be inconsistent with the underlying remedial purpose of RICO,*fn12 and that the five-year statute of limitations for fraud cases would be most consistent with Congress' mandate that RICO be liberally construed.*fn13 The allegations of the complaint support this conclusion. This lawsuit deals with an alleged fraud by a broker against his principal. Mail fraud is the basis of the action, not lack of disclosure, false information, or other violations traditionally redressed by the securities laws. Therefore, unlike the limitations period for fraud, application of the limitations period for securities violations would not necessarily effectuate the policies and purposes underlying the civil RICO statute.

Plaintiffs' RICO claim was brought well within the five-year limitation period for fraud. The fraudulent acts allegedly occurred in February and March, 1980, and the complaint was filed in July of 1984. In such circumstances, determining whether plaintiffs' complaint was filed within the applicable period can be determined in the context of a motion to dismiss. See Morgan v. Koch, 419 F.2d 993 (7th Cir. 1969).

In accordance with the foregoing opinion, defendants Krumhorn and Smith's motion to dismiss is denied.

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