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ASSOCIATES IN ADOLESCENT PSYCHIATRY v. HOME LIFE I

July 23, 1990

ASSOCIATES IN ADOLESCENT PSYCHIATRY, S.C., et al., Plaintiffs,
v.
HOME LIFE INSURANCE COMPANY OF NEW YORK, a New York corporation, et al., Defendants


John A. Nordberg, United States District Judge.


The opinion of the court was delivered by: NORDBERG

JOHN A. NORDBERG, UNITED STATES DISTRICT JUDGE

 Previously the Court granted summary judgment in favor of defendants and against plaintiffs on plaintiffs' ERISA and securities claims. Associates in Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 729 F. Supp. 1162 (N.D. Ill. 1989). The parties have since filed supplemental briefs concerning the defendants' motion for summary judgment on plaintiffs' RICO claims. These motions for summary judgment are now also granted. Because all of plaintiffs' federal claims have fallen, the Court has decided not to exercise pendent jurisdiction over the sole remaining common law claim, which alleges attorney malpractice, pursuant to the Court's discretion under United Mine Workers v. Gibbs, 383 U.S. 715, 728, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). The background facts and parties were detailed in the Court's earlier opinion (see 729 F. Supp. at 1165-69) and will not be repeated, except as necessary to understand why the Court grants summary judgment on the RICO claims.

 Plaintiffs allege violations of the three substantive provisions of RICO, 18 U.S.C. §§ 1962(a), (b) & (c). They had previously made allegations of conspiracy under § 1962(d), but dismissed them voluntarily at the close of discovery. Plaintiffs now seek to reinstate their conspiracy allegations; they argue that the Court's finding that Home Life used its own funds (rather than plaintiffs') for the HTNB "float" (see 729 F. Supp. at 1169, 1181) evidences a kickback scheme, in violation of 18 U.S.C. § 1954. But reinstatement will not be allowed, because the Court has determined that there are no substantive RICO violations to support a claim of conspiracy.

 Each substantive violation of RICO requires plaintiff to prove a "pattern" of racketeering activity, which in turn requires plaintiff to prove the commission of "at least" two predicate acts of racketeering within ten years. 18 U.S.C. §§ 1961(5), 1962(a)-(c); Management Computer Services, Inc. v. Hawkins, Ash, Baptie & Co., 883 F.2d 48, 50 (7th Cir. 1989). Predicate acts are catalogued in § 1961(1). Having considered the evidence most favorably to plaintiffs, and having drawn all reasonable inferences in their favor, the Court concludes that plaintiffs nevertheless could not persuade a reasonable jury that defendants have committed any predicate acts specified in § 1961(1). Palucki v. Sears, Roebuck & Co., 879 F.2d 1568, 1570 (7th Cir. 1989). As there are no genuine disputes of material fact, judgment may be granted pursuant to Fed. R Civ. P. 56 as a matter of law. Weihaupt v. American Medical Ass'n, 874 F.2d 419, 424 (7th Cir. 1989).

 The core of plaintiffs' theory -- supported by a seventy-seven page brief -- is that defendants engaged in three (Response Memorandum, at 17) separate but independent schemes: (1) a scheme to avoid regulation by state insurance commissions; (2) a kickback scheme, accomplished by use of the Home Life-HTNB float, in violation of 18 U.S.C. § 1954; and (3) theft or embezzlement of benefit-plan funds, in violation of 18 U.S.C. § 664. These identifiable schemes further intertwined with a "closed-ended scheme" to induce AAP "to purchase Defendants' pension services and products." Response Memorandum, at 18.

 The allegations concerning the first "scheme" fail as a matter of law. Plaintiffs argue that the Home Life Corporate Plan Trust was established in Rhode Island because most states forbade selling the FA directly to their citizens, and because Rhode Island had no regulations applicable to the GAC (though, as this Court previously found, there is no question that Home Life submitted copies of the GAC to Rhode Island insurance officials, see 729 F. Supp. at 1168, 1173). Response Memorandum, at 18-19. As defendants have noted, there is nothing illegal about taking advantage of favorable state laws to conduct business, even if this means avoiding regulation by certain states; it is no more illegal to set up a trust in Rhode Island to avoid more onerous New York insurance statutes than it is to incorporate in Delaware to avoid more onerous New York corporate statutes. This sort of business planning inheres in federalism.

 Similarly unavailing is plaintiffs' claim that the float arrangement constituted an unlawful kickback scheme under 18 U.S.C. § 1954. As the Court explained in its previous opinion, the float cost plaintiffs nothing, because their contributions were immediately put out at interest pursuant to the terms of the FA -- in fact, Home Life began crediting the contributions with interest before the contribution checks had cleared. 729 F. Supp. at 1181. Due to this fact, the floated funds were in reality Home Life's own, not plaintiffs'. The entire cost of the float was borne directly by Home Life; whether the cost was passed on to the plaintiffs cannot be determined from the record, but even assuming that it was, this assumption is of no more import than an assumption that Home Life factored its other costs of doing business into the fee and interest structures of the FA. The entire transaction was structured to accommodate Home Life's marketing and sale of the FA, particularly its desire to set up an active, rather than a passive, trust (729 F. Supp. at 1181); to label Home Life's payment of an additional fee to HTNB in the form of the float a "kickback" is to ignore the substance of the transaction. Funds are not kicked back when two independent entities agree between themselves as to the payment to be made for services rendered.

 Nor were any funds of plaintiffs stolen or embezzled, contra plaintiffs' third alleged scheme. The funds transmitted from Home Life to HTNB were in economic reality Home Life's own. The plaintiffs were paid interest on their contributions from the time Home Life received them, as promised by the contract. Cf. Kimmel Dep., at 44 (Plaintiff's Supplemental Summary Judgment Ex. I). There was no violation of 18 U.S.C. § 664.

 This leaves plaintiffs with only mail and wire fraud on which to base their claim that defendants committed predicate acts. To prove a claim of mail or wire fraud, plaintiff must establish by a preponderance of evidence (1) the existence of a scheme to defraud; (2) intent to defraud; and (3) use of the mails or wires to further the scheme. United States v. Cosentino, 869 F.2d 301, 308 (7th Cir.), cert. denied, 492 U.S. 908, 106 L. Ed. 2d 570, 109 S. Ct. 3220 (1989); Mid-State Fertilizer Co. v. Exchange Nat'l Bank, 693 F. Supp. 666, 673 n.7 (N.D. Ill. 1988), aff'd, 877 F.2d 1333, 1337 (7th Cir. 1989). Fraud is defined according to the universal principles recognized by state and federal courts. To prove fraud, a plaintiff must show "(1) that the defendants made a false representation of a material past or existing fact; (2) which was known to be false when made; (3) the misrepresentation must have been made intentionally to induce the plaintiff to act; (4) the plaintiff must rely on the misrepresentation and have the right to rely; and (5) the plaintiff must be injured as a result of such reliance." North American Financial Group, Ltd. v. S.M.R. Enterprises, Inc., 583 F. Supp. 691, 697 (N.D. Ill. 1984); accord Dunham v. Independence Bank of Chicago, 629 F. Supp. 983, 987 (N.D. Ill. 1986). For the reasons stated below, the Court concludes that plaintiff has failed to put forward evidence from which a reasonable jury could conclude that these requirements have been met.

 As a preliminary matter, the Court observes that plaintiffs have supported their claims of material misrepresentations and omissions by presenting the affidavit of Marvin J. Schwarz. This affidavit was not presented to the Court in its current state of detail until after the Court granted summary judgment on plaintiffs' securities and ERISA claims. Although lengthy (twenty-four pages), the affidavit is generally composed of conclusionary statements concerning information that Schwarz says he deemed material without giving any explanation of why that information would have been material to his decision to purchase the Home Life products. It is well settled that "conclusional statements in affidavits 'are entitled to little weight in deciding whether to grant' a motion for summary judgment." Malhotra v. Cotter & Co., 885 F.2d 1305, 1309 (7th Cir. 1989) (quoting Products Liability Ins. Agency, Inc. v. Crum & Forster Ins. Cos., 682 F.2d 660, 662 (7th Cir. 1982)). Having made this observation, the Court turns to the specific allegations contained in Schwarz's affidavit and the plaintiffs' supplemental memorandum in opposition.

 Perhaps the principle allegation Schwarz now makes is that "Canapary assured [Schwarz] that the funding instruments that he had recommended for AAP's Plans would earn rates of return equal to the best rates of return in the marketplace." Schwarz Aff. para. 21. By this allegation, Schwarz explains that the rate of return "would yield investment returns equal to the best mutual funds." Id. para. 20.

 In the Court's view, the foregoing assertions on their face are simply too extreme and confused to have been believed. Reliance must be justifiable. North American Financial Group, 583 F. Supp. at 698. The principal and yield in the Home Life FA (not to mention the PSWL, which on its face showed that it was nothing more than a whole life insurance policy, see 729 F. Supp. at 1177) was to be guaranteed -- all in return for a one-time contribution charge of 6.75% of each contribution collected (plus a minimum charge of $ 15 and a collection fee of $ 1 per contribution). Schwarz Aff. para. 19; 729 F. Supp. at 1167. Some mutual funds choose to assess little or no load charges, i.e., sales charges, because they sell their fund shares directly to the public rather than through brokers. Others have a load charge (some in excess of 6.75%) to reimburse brokers and salesmen. Moreover, all mutual funds charge a continuing management fee or service charge each year. They also do not guarantee principal or yield. Schwarz, on the other hand, purchased a debt instrument -- similar to a certificate of deposit, but with partial variable interest -- that guaranteed his principal and yield for the next 12 months. Though the contribution charge was higher than some mutual fund load charges, there was no continuing service charge or management fee other than the token $ 15 yearly charge. Plaintiffs have put forward no evidence that there was any contemporaneous financial instrument being offered that guaranteed principal, yield and the best mutual fund rates in exchange for a one-time 6.75% contribution charge. Their allegations are made even more incredible when coupled with Schwarz's additional assertion that the contribution charge was also a fee for "life-time pension and investment advisor services." Schwarz Aff. para. 20. This would mean that plaintiffs were to get not only guaranteed principal and yield earning the best mutual fund rates, but also a variety of professional services.

 Justifiable reliance aside, a reasonable jury could not find that Schwarz even relied in fact upon such a representation that the FA would earn the best future mutual fund rates. It is undisputed that before Schwarz ever decided to invest in the FA, he was given a copy of the Home Life Flexible Annuity bulletin. See Canapary Defendants' Reply Brief, Ex. A. This disclosed that the future rate to be paid on contributions made in 1977 was 7 3/4%. Nevertheless, Schwarz proceeded to invest for his own account, net of expenses, more than $ 80,000 for two FA certificates in that year. Id. Exs. C & D. The oral promise that the interest rate would equal the best future mutual fund rate (assuming that it did not do so) could not have affected Schwarz's decision, because the actual guaranteed interest rate was disclosed to him in advance; this was the rate that he in fact relied upon and agreed to. Besides, no one can foretell the future best mutual fund rate. Apart from the ...


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