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Appley v. West

decided: November 2, 1987.

MARY KOCHTON APPLEY, PLAINTIFF-APPELLEE,
v.
STUART WEST, DEFENDANT-APPELLANT; MARY KOCHTON APPLEY, PLAINTIFF-APPELLANT, V. NATIONAL REPUBLIC BANK OF CHICAGO, DEFENDANT-APPELLEE



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division, No. 84 C 6025, Charles P. Kocoras, Judge.

Coffey, Ripple and Manion, Circuit Judges.

Author: Ripple

RIPPLE, Circuit Judge.

Mary Kochton Appley brought suit in the district court against Stuart West, individually and as trustee of a trust agreement, and against the National Republic Bank of Chicago (Republic Bank) after she was allegedly defrauded of substantial financial assets. The district court granted summary judgment in favor of Ms. Appley on her claim against Mr. West for a civil violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(b)-(c), 1964(c). Mr. West appeals the order of the district court reinstating summary judgment in favor of Ms. Appley on the civil RICO claim in the amount of $2,871,000.*fn1

Ms. Appley alleged Illinois state law claims based on the Uniform Commercial Code (UCC) and the common law of negligence and bad faith against Republic Bank.*fn2 The district court granted summary judgment in favor of Republic Bank on the UCC claim and dismissed the claims for negligence and bad faith. Ms. Appley appeals the judgment of the district court in favor of Republic Bank.

For the reasons set forth in the following opinion, we reverse the judgment of the district court in favor of Ms. Appley on her RICO claim against Mr. West and reverse the judgment of the district court in favor of the Bank on Ms. Appley's claims under the UCC and Illinois common law.

I

Background

Ms. Appley executed a trust agreement with the First National Bank of Chicago in August 1967 to receive any sums distributed to Ms. Appley from a trust established for her by her parents in 1947. Mr. West, a friend of Ms. Appley's parents, and Ms. Appley's attorney, investment advisor and confidant, became the sole individual trustee of the 1947 trust in June 1973. In August 1973, Mr. West became the sold individual of the trustee of the 1967 trust. During late June and early July of 1979, Mr. West caused all assets of the 1947 trust to be transferred into the 1967 trust. In April 1980, Mr. West advised Ms. Appley to terminate the 1967 trust; Mr. West had told Ms. Appley that he would manage her investments for her.

Ms. Appley took Mr. West's advice. Securities from the 1967 trust were sold through an account opened by Ms. Appley, on Mr. West's advice, at Dean Witter Reynolds, Inc. Dean Witter thereafter issued checks made payable to Ms. Appley. On the advice of Mr. West, Ms. Appley used the Dean Witter checks to open three bank accounts -- two at the National Republic Bank of Chicago and one at the Suburban Trust and Savings Bank of Oak Park (Suburban Trust).*fn3 Both Ms. Appley and Mr. West were signators on one of the Republic Bank accounts (Stuart West: Special Account). Ms. Appley was the sole signator of the second Republic Bank account (M.A. Ltd. Account). Monthly bank statements and cancelled checks from the two Republic Bank accounts and the Suburban Trust account were sent to the address of Mr. West's law office.

On June 28, 1985, Mr. West pleaded guilty to two counts of mail fraud in violation of 18 U.S.C. § 1341. R.80, Ex. A at 7, 21. The twenty-count grand jury indictment, of which Mr. West pleaded guilty to Counts I and XII, charged Mr. West with engaging in a scheme to defraud Ms. Appley and her mother, Mary Kochton, of money through false and fraudulent pretenses, representations and promises. The indictment further charged that, as part of the scheme to defraud, Mr. West "fraudulently and wrongfully obtained and converted to his own benefit and use in excess of $575,000 in funds belonging to Mary K. Appley, in violation of his fiduciary duties as an attorney and trustee, and $200,000 in funds belonging to Marie Kochton." United States v. Stuart West, No. 84 CR 805, indictment at 2, para. 9 (N.D. Ill. 1984) [hereinafter Indictment]. The two acts of mail fraud, which were committed in furtherance of the scheme to defraud, involved the mailing of the monthly bank statements and cancelled checks from the Republic Bank/M.A. Ltd. Account and the Suburban Trust account to Mr. West's law office address.

During the June 28, 1985 plea hearing, the government and defense counsel agreed that the minimum amount that Mr. West embezzled from Ms. Appley was $495,000. R.80, Ex. A at 3, 11-13, 20. At the sentencing hearing, the government and defense counsel reached an agreement according to which the government would submit to the court "its version of the offense which would seek restitution in the amount of $957,000." R.80, Ex. D at 3. Mr. West concurred in the agreement recommended by his counsel and presented to the court. Id. The court agreed that there were two versions of the offense. Id. at 4. The government counsel emphasized "that the parties do in essence agree to disagree, and that the purpose in arrival at the agreed-upon sentence was, in part, to obviate the need for an evidentiary hearing with respect to the material differences in events in each of the versions." Id. at 4-5. The court sentenced Mr. West to five years imprisonment on Count I, two years imprisonment on Count XII, consecutive to Count I, and ordered restitution in the amount of $957,000. Id. at 5.

II

Claims Against Mr. West

A. District Court Proceedings

In July 1984, Ms. Appley filed suit against Mr. West and Republic Bank. The complaint alleged five claims against Mr. West: 1) Count I -- civil RICO; 2) Count II -- fraud and deceit; 3) Count III -- negligent misrepresentation; 4) Count IV -- breach of fiduciary duty; and 5) Count VI -- suit for an accounting. In October 1985, after Mr. West had pleaded guilty to the two counts of mail fraud and had been sentenced on those counts, Ms. Appley filed a motion for summary judgment against Mr. West. R.80. Ms. Appley argued that she was entitled to summary judgment as a matter of law because Mr. West pleaded guilty to mail fraud counts and was sentenced to pay restitution in the amount of $957,000. R.80 at para. 7. In her summary judgment motion, Ms. Appley requested treble damages of $2,871,000 on Count I (civil RICO). In the alternative, she requested summary judgment in the other common law claims individually in the amount of $957,000. Id. The district court granted Ms. Appley's motion for summary judgment. It "granted $957,000 under Count I to arrive at a total of $2,871,000." R.136 at 2.

On the motion of Mr. West,*fn4 the district court vacated its earlier order granting summary judgment. R.86. It its earlier order granting summary judgment in favor of Ms. Appley in the amount of $957,000 without writing an opinion or specifying the count(s) on which it was granted. Id. Thereafter, Ms. Appley filed a motion to reinstate summary judgment in her favor in the amount of $2,871,000. R.106.*fn5 The district court granted Ms. Appley's motion and reinstated summary judgment against Mr. West in the amount of $2,871,000 on the civil RICO claims. R.135.

The district court issued a memorandum opinion with the order reinstating summary judgment on the civil RICO claim. R.136. The court examined the elements of a civil RICO violation and "[t]he allegations of fact . . . established through [Mr. West's] admissions and the doctrine of collateral estoppel," id. at 4, to determine "whether these facts conclusively constitute a civil RICO violation," id. The court agreed with Ms. Appley that "the established facts of the schemes and the acts of mail fraud from the indictment constitute a 'pattern of racketeering activity' under civil RICO." Id. at 5. It determined that the material allegations of the indictment satisfied the requirement under Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985), "that there is continuing activity plus a relationship which combine to produce a pattern." R.136 at 6. The court then stated that the 1967 trust (No. 64036) and the Sage Acceptance Corporation*fn6 met the definition of an "enterprise" under the RICO statute. R.136 at 8. The court noted that Ms. Appley's burden is to establish a "person" and an "enterprise" that are distinct legal entities in order to prevail in her civil RICO claim. The court found that Mr. West, "as the 'personal liable,' is an entity separate from the Trust." Id. at 10. The district court then stated: "It also appears likely that West is an entity separate from the enterprise of the Sage Acceptance Corporation." Id. "Without any further knowledge of Sage Acceptance Corporation, the court cannot determine if it qualifies as an enterprise distinct from West." Id. at 11.

Next, the court concluded that Ms. Appley had shown that Mr. West maintained an interest in or control over the enterprise of the trust (under section 1962(b)) and that Mr. West conducted or participated in the conduct of an enterprise of the trust (under section 1962(c)) based on his admissions that he had defrauded Ms. Appley by becoming trustee of the trust and controlling it by embezzling its funds. The court also determined that Ms. Appley had been injured by Mr. West's acts. Thus, concluded the district court, Ms. Appley "has conclusively shown the defendant's violation of civil RICO." Id. Further, the district court concluded that the doctrine of collateral estoppel permitted it "to find that the issue of [Ms. Appley's] losses as a result of [Mr. West's] wrongful acts is established by his concurrence in the Sentencing Report and Judge Moran's sentence based on the Government's version of the facts." R.136 at 3. Accordingly, the district court trebled the amount of restitution ordered as part of the criminal sentenced and entered summary judgment in favor of Ms. Appley in the amount of $2,871,000.

B. Discussion

In this appeal, Mr. West argues that the district court erred in granting Ms. Appley's motion to reinstate summary judgment against him in the amount of $2,871,000*fn7 because 1) the actual amount of Ms. Appley's loss remained a disputed factual issue, and 2) the ...


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