claims and defenses that Mr. and Mrs. Heard have against Chicago Lumber. See 16 C.F.R. part 433. The complaint alleges that Chicago Lumber failed to complete important portions of the installment contract and backdated the contract to December 1, 1986, the date of the "cash sales contract." When the Heards signed the installment contract, they simultaneously mortgaged their home to provide security for the loan. Chicago Lumber assigned this contract to Dartmouth sometime after Chicago Lumber completed its work on the Heard's home.
Plaintiffs do not allege that Dartmouth was directly responsible for Chicago Lumber's alleged fraud on the Heards. Instead, the plaintiffs allege that Dartmouth is liable because it knew that the contracts initiated by Chicago Lumber were "tainted by fraud and improper business practices." (Amended Complaint, p. 14, para. 55).
The complaint imputes knowledge to Dartmouth on the grounds that Dartmouth itself had been the subject of both a civil complaint and a criminal investigation by the Attorney General of Connecticut and therefore was "on notice . . . that it had to investigate the character and business practices of the home improvement contractors selling contracts to it." Id. Finally, the plaintiffs complain that Dartmouth should have known that the installment contract was backdated because it had received applications for credit from the Heards with dates subsequent to December 1, 1986.
The plaintiffs' complaint does not assert a claim under any federal law against Dartmouth. Count I of the complaint seeks treble damages from "the defendants other than Dartmouth, jointly or severally," under Section 1962(a) of RICO. (Amended Complaint, p. 16) (emphasis added). Count II charges defendants Edelson, Chicago Lumber, All American, and their agents with violating Section 2 of the Illinois Consumer Fraud and Deceptive Business Practices Act ("Consumer Fraud Act"), Ill. Ann. Stat. ch. 121 1/2, para. 262 (Smith-Hurd, Supp. 1989), and charges Dartmouth with aiding and abetting these violations. Count III charges Dartmouth with violating the Illinois Sales Finance Agency Act ("Finance Agency Act"), Ill. Ann. Stat. ch. 17, para. 5202 et seq. (Smith-Hurd, 1981), by accepting the assignment of the Heard's contract. Count IV and V assert causes against defendants other than Dartmouth for breach of contract. Finally, Count VI alleges that the FTC language contained in the installment contract renders Dartmouth contractually liable for Chicago Lumber's alleged violations of RICO (Count I), the Consumer Fraud Act (Count II), and breach of contract (Count V).
A. Pendent Party Jurisdiction
Dartmouth has moved to dismiss this case on the grounds that this court lacks subject matter jurisdiction over the claims the plaintiffs assert against Dartmouth. Dartmouth notes that the plaintiffs' complaint asserts only state law causes of action against Dartmouth, and contends that this court therefore has subject matter jurisdiction over Dartmouth only through the doctrine of pendent party jurisdiction. Dartmouth argues vigorously that the allegations of the plaintiffs' complaint are not sufficient to invoke the pendent party jurisdiction of this court.
"Pendent party jurisdiction arises when a plaintiff brings a federal claim in federal court against one party, and brings a related state-law claim against another party."
Huffman v. Hains, 865 F.2d 920 (7th Cir. 1989). In Huffman, the Seventh Circuit described the factors which bear on a court's decision to exercise its pendent party jurisdiction:
Our cases have set forth a two-step analysis to determine whether pendent party jurisdiction exists in a particular case. First, the court must examine whether the constitutional power to exercise such jurisdiction exists. Second, the court must examine whether Congress has limited the court's power to exercise pendent party jurisdiction in the specific statutory provision conferring federal jurisdiction in that case. The constitutional power to exercise pendent party jurisdiction exists if the federal claim is not frivolous, the federal and state claims "'derive from a common nucleus of operative fact,'" and the federal and state claims are the kind that the plaintiff "'would ordinarily be expected to try . . . in one judicial proceeding.'" The statutory power to exercise pendent party jurisdiction depends upon whether "Congress in the [particular statutory grant at issue] has . . . expressly or by implication negated" pendent party jurisdiction.
Huffman, 865 F.2d at 922-23 (citations omitted). See also Citizens Marine National Bank v. United States Department of Commerce, 854 F.2d 223, 226-27 (7th Cir. 1988), cert. denied, 489 U.S. 1053, 109 S. Ct. 1312, 103 L. Ed. 2d 582 (1989); Zabkowicz v. West Bend Co., 789 F.2d 540, 547 (7th Cir. 1986); Vantine v. Elkhart Brass Mfg. Co., Inc., 762 F.2d 511, 519 (7th Cir. 1985); Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 187-88 (7th Cir. 1984). The decision of whether to exercise pendent party jurisdiction is a matter of the court's discretion, and not a matter of right. United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966).
After reviewing the allegations of the complaint in light of this standard, the court determines that it has the constitutional power to exercise pendent jurisdiction over Dartmouth. It is clear that the plaintiffs' RICO claim is not frivolous, especially in light of the defendants' experience with similar complaints of fraud.
It is also clear that the plaintiffs' allegations against Dartmouth might logically be tried together with the claims against the other defendants. The essence of the plaintiffs' case against Dartmouth is that it accepted the assignment of installment contracts which the other defendants had procured through fraudulent means. A plaintiff logically might bring a claim against the assignee of the contracts in the same lawsuit as a claim against the original holder of the contracts.
Finally, the plaintiffs' allegations concerning Dartmouth are factually linked to the allegations against the other defendants. Dartmouth insists that the complaint's allegations of RICO fraud encompass only the methods by which Mr. Edelson and his agents procured the home improvement contracts, and contend that Dartmouth was involved in the scheme only as an assignee of the ultimate installment contract. However, the complaint alleges that Dartmouth was a knowing participant in the improper business practices of Chicago Lumber. According to the complaint, the installment contract which Chicago Lumber presented to the Heards was written on a pre-printed Dartmouth form. (Amended Complaint, para. 46.) Plaintiffs allege that Dartmouth knowingly permitted Chicago Lumber to backdate the Heard's contract. (Amended Complaint, para. 56.) Plaintiffs also allege that Dartmouth had a previous history of involvement with allegedly fraudulent home improvement scams. (Amended Complaint, para. 55.) Plaintiffs' claims that Dartmouth violated various state consumer protection statutes therefore are integrally connected to the plaintiffs' claims against Mr. Edelson and his companies.
The second factor this court must consider in deciding whether to exercise pendent party jurisdiction over Dartmouth is whether Congress has limited or negated pendent jurisdiction in the RICO statute. Resolution of this step in the analysis "calls for careful attention to the relevant statutory language." Finley v. United States, 490 U.S. 545, 550, 109 S. Ct. 2003, 104 L. Ed. 2d 593 (1989), quoting Aldinger v. Howard, 427 U.S. 1, 96 S. Ct. 2413, 49 L. Ed. 2d 276 (1976), where the Court held that district courts cannot entertain claims against pendent parties when the federal statute which confers jurisdiction excludes those parties from its coverage.
Citing Fleet Credit Corp. v. Sion, 699 F. Supp. 368 (D.R.I. 1988), Dartmouth contends that federal courts should decline to exercise pendent party jurisdiction in order to curtail abuses of the RICO statute:
The purpose of RICO is to protect legitimate businesses from organized crime, not to provide a federal cause of action for state law contract claims. Due to the overbreadth of the statute as written and in contravention of legislative intent, the federal courts may now be faced with a flood of civil RICO actions stemming from ordinary contract fraud disputes. However, this is no reason to allow non-RICO state law claims against parties not before the Court to wash in on the incoming tide.
699 F. Supp. at 381 (dicta).
Although this court is acutely aware that plaintiffs often stretch ordinary claims of fraud into federal claims under the RICO statute, this awareness does not dictate the result that Dartmouth seeks. Nothing in the language of RICO indicates that Congress intended to preclude a plaintiff from bringing an action under a state consumer fraud statute as a pendent claim to a RICO claim. Section 1964(c) states simply that:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.