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JACOBSOHN v. MARKS

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION


April 1, 1993

CAROL MARKS JACOBSOHN, Plaintiff,
v.
LOUIS MARKS, JERROLD MARKS, MARTIN ROSENFIELD, RICHARD ROSENFIELD, EVERGREEN THEATRE CORPORATION, FINE ARTS THEATRES, INC., HILLSIDE SQUARE THEATRES, INC., M&R THEATRES, INC., and its subsidiaries, NORRAN CORPORATION, OLD ORCHARD THEATRE CO., EVANSTON THEATRES, INC., HYDE PARK THEATRES, INC., DEARBORN THEATRES, INC., RIVER RUN THEATRES, INC., WEBSTER PLACE THEATRES, INC., and M&R MANAGEMENT CORPORATION, OLD ORCHARD CARWASH, INC., and LOEWS CHICAGO CINEMA, INC., Defendants.

The opinion of the court was delivered by: CHARLES RONALD NORGLE, SR.

OPINION AND ORDER

 CHARLES R. NORGLE, SR., District Judge:

 Before the court is plaintiff Carol Marks Jacobsohn's ("plaintiff") objections to Magistrate Judge Edward A. Bobrick's February 26, 1993 Report and Recommendation ("Report," attached as Exhibit A). For reasons outlined below, the court sustains the objections, rejects the Report, and recommits the matter to the Magistrate Judge for ruling on the remaining motions.

 BACKGROUND

 Pursuant to 28 U.S.C. § 636(b)(1)(B), the court referred to the Magistrate Judge the individual defendants' *fn1" motion for summary judgment and all defendants' motions to dismiss. After hearing the motions, the Magistrate Judge issued a nineteen-page Report recommending that the motion for summary judgment be granted as to the counts under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(b), (c), on statute of limitations grounds, and that the remaining counts thus be dismissed for lack of subject matter jurisdiction.

 The facts underlying the present controversy are detailed in the Report and need not be repeated in full. In brief, it is plaintiff's position that the racketeering activities of the individual defendants caused her business interest in the original companies, with which she was involved, to be diluted by the investments in the new enterprises; these investments were accomplished through the individual defendants' use of intra-company funds. Plaintiff's position is that she needed to become a shareholder in the newly formed theatre corporations in order to maintain her overall level of interest in the family business. The individual defendants therefore allegedly committed fraud by failing to disclose material information regarding the funds used for the investments and other aspects of the transactions that would have otherwise caused plaintiff to participate in the investments. The individual defendants then obtained a superior financial position in the family business when it was sold to Loews. The individual defendants' fiduciary duties supposedly arose from their positions as directors and officers of the M&R theatre corporations, as well as their familial relationships. Plaintiff alleges that she would have invested in the new corporations in order to maintain her previously existing interest in the business. Therefore, but for the individual defendants' fraud, plaintiff would have possessed a greater financial interest in the business.

 The Magistrate Judge determined that the RICO claims were barred by the applicable statute of limitations because plaintiff discovered or reasonably should have discovered the RICO violation in 1984. Objections to the Report were filed March 15, 1993, and the issues are now ripe for consideration by this court.

 DISCUSSION

 The court has completely reviewed the Report and arguments of counsel de novo. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). The Court finds plaintiff's objections to have merit. The court does not adopt the recommended decision but instead denies the motion for summary judgment. On the current record, there exists a factual dispute as to whether or when a RICO injury occurred, namely the dilution of her interest in the M&R businesses, and also whether plaintiff was aware or should have been aware of that injury. Therefore, the court cannot find that her action is barred by the statute of limitations. Nonetheless, the Magistrate Judge has had more involvement with the substantive issues of this case up to its present point and therefore the matter is recommitted to the Magistrate Judge to issue a recommendation on the remaining fully briefed motions.

 RICO allows a person to bring a civil action against people who, through a "pattern of racketeering activity," associate with or operate "enterprises." McCool v. Strata Oil Co., 972 F.2d 1452, 1464 (7th Cir. 1992) (citing 18 U.S.C. § 1962(a)-(d)). To recover, the plaintiff must establish (1) that the defendant violated the statute, which includes that the defendant participated in a pattern of racketeering, and (2) that the plaintiff sustained an injury to business or property. Id. A cause of action does not accrue until a pattern of racketeering exists and an injury has been sustained. Id. at 1465. Accordingly, the four-year statute of limitations for civil RICO claims begins to run once there is a RICO violation and the plaintiff knew or should have known that he or she was injured. Id. at 1464-65; see also In re VMS Limited Partnership Sec. Litig., 803 F. Supp. 179, 188 (N.D. Ill. 1992).

 Plaintiff urges the court to hold that she was injured and that she discovered the injury at the time the sale was made to Loews theatre. The court does not take the position that the sale was the point in time the injury was sustained, nor, however, does it take the position that the evidence conclusively demonstrates that the sale is the point at which plaintiff became aware of an injury. Instead, the court finds there is a genuine issue of fact on when the injury occurred and when plaintiff became aware of a RICO injury.

 Under RICO, "injury" means damage to business or property. 18 U.S.C. § 1964. The Magistrate Judge believed that plaintiff was injured by not investing in the new theatre corporations and that she learned of the injury when she discovered the truth underlying the alleged omissions, Report, at 16, which was, in the Magistrate Judge's view, at the time of the original investments. But this is too akin to knowledge of the racketeering activities of the defendants and not the damage that her business or property interests would suffer. Also, if it is true that all information was disclosed to plaintiff at the time of the investment, then there could be no fraud. But plaintiff's allegations contain more than that the individual defendants hid the funding scheme for the new corporations. Plaintiff alleges that the defendants intentionally failed to reveal six factors: (1) that the assets and credit of the original corporations were used to fund the new corporations; (2) that the formation of the new entities were corporate opportunities of the original corporations; (3) that the defendants were obtaining full ownership of all of the new corporations while making minimal personal capital contributions to them; (4) the basis upon which they rested their decision to invest their own assets as well as the original corporations' assets in the new enterprises; (5) that plaintiff could only effectively maintain her interest in the original corporations if she became a shareholder in the new corporations; and (6) that plaintiff's assets were already at risk, that her risk of loss from a small investment in the new corporations would be low, and those investments would create a potential for additional profits in return. Without vouching for the truth of these matters, the court accepts that these facts were not disclosed. Whether such conduct constitutes fraud under both common law and the federal mail and wire fraud statutes remains to be seen.

 The Magistrate Judge believed that plaintiff could reasonably have known that, at the time the opportunities were offered, she must invest in the new enterprises to maintain the same level of interest in the M&R business as she previously held. But the facts supporting that position are not free from doubt. It may be that she had prior dealings in these areas and there was enough information for her to know she was losing her interest in the M&R businesses. True, if she had all the information regarding the financing of the new companies in her possession at the time the investments in the new companies were made, plaintiff may have been aware of the dilution of her business interests, or at least should have reasonably been aware. Plaintiff's cause of action would therefore accrue at that point. A person who knows of racketeering activities and the effect those activities would have on that person's business affairs or property rights should not be expected to wait until the full effect is realized, such as through the sale in this case, to file a suit. Once the investment was made, the injury was done. See, e.g., Radiology Center, S.C. v. Stifel, Nicolaus & Co., 1992 U.S. Dist. LEXIS 13584, at *5 (N.D. Ill. Sept. 8, 1992) (injury occurred when pension plan assets were used to purchase high-risk securities for purpose of generating commissions for the defendants and not for fulfilling plaintiffs' investment goals).

 On the other hand, if the investments failed then there would be no injury (plaintiff would not be clamoring to get a piece of the loss), and thus "no blood, no foul." McCool, 972 F.2d at 1466. To accept the Magistrate Judge's position that plaintiff knew of her injury (missed investment opportunities) at the time the truth of the financing was revealed (contemporaneous with the investments) and that this discovery thus started the statute of limitations time-clock running, the court must assume that plaintiff's injury also occurred at the time the investments in the new companies were made. And even assuming plaintiff's theory of RICO is correct, the injury may have been sustained at the time of the investments in the new companies. Nevertheless, it is not established that there was an injury at that point. Additionally, it still may not have been until the sale to Loews that plaintiff became aware that fraud was afoot and that she consequently had a disproportionate interest in the M&R businesses. See, e.g., Cruden v. Bank of New York, 957 F.2d 961, 977-78 (2d Cir. 1992) (injury occurred at time of default on debentures; at time of fraudulent transfers, injury was too speculative and not remediable under § 1964(c)).

 The facts show that plaintiff has little experience in corporate matters and supposedly relied entirely on the individual defendants to protect her interests. The individual defendants, experienced businessmen, allegedly failed to disclose facts to plaintiff that were necessary for her to maintain her interest. There are no facts in the record, beyond the ambiguous deposition testimony in an unrelated case, to establish exactly what she knew about the new theatre corporations.

 The Magistrate Judge primarily and substantially relied upon plaintiff's deposition testimony from a state court probate proceeding in concluding that she had sufficient knowledge of the business affairs. But the court perceives more ambiguity in that testimony than the Magistrate Judge, especially when viewed in a light more favorable to plaintiff, and therefore finds her statements subject to a factfinder's interpretation. The June 1989 deposition proceeded as follows:

 

Q: You were offered, were you not, the opportunity to invest in the Hyde Park and Evanston Theatres?

 

A: I was asked to participate in those theatres.

 

Q: And you chose not to do so?

 

A: I felt that if they financed them through properties in which the estate had an interest, I would automatically participate by my shares and ownership in the estate.

 

* * *

 

Q: Can you explain how you believed you would automatically participate?

 

A: Well, it just seemed very logical that if properties in which I personally or the estate had ownership made loans to new properties, that there would be an automatic participation by the properties from which the loans came.

 

Q: And did you ever express that understanding at the time that the development of the Evanston Theatre was being discussed . . . ?

 

A: The subject never came up.

 The Magistrate Judge determined that plaintiff was attempting chicanery by arguing that, "when it came time to decide whether to invest in the new theatre corporations, she had no idea how they were financed, but for the purposes of discovering her injury . . . she knew exactly how they were financed but was operating under a misapprehension as to the effect of that financing." Report, at 16-17. But plaintiff was not deposed on the precise question as to when she discovered her injury or whether she knew that the investments were financed through inter-company assets. Furthermore, the testimony may demonstrate that she was aware that there was a possibility that inter-company funds could be used, but it does not conclusively demonstrate that she was aware that, insofar as these precise investments were concerned, corporate assets were involved. Although admissions can be a "trump" in a summary judgment motion under the proper circumstances, see Reed v. Gardner, 1993 U.S. App. LEXIS 3046, No. 91-3173, slip op. at 13 (7th Cir. Feb. 23, 1993), but these are not the right circumstances. Her deposition testimony, and the other facts on record, do not demonstrate that things were "so clearly amiss" such that the court "could conclude that plaintiffs should have discovered the alleged fraud" at the time the investments were offered to her or were made. See VMS Ltd. Partnership, 803 F. Supp. at 191.

 In sum, the Magistrate Judge's equating of plaintiff's discovery of her injury with her knowledge of "the truth underlying the alleged omissions" is erroneous in light of the ambiguity of plaintiff's deposition testimony and ambiguity regarding when an actual injury was discovered. See McCool, 972 F.2d at 1465-66 (accrual of cause of action depends on existence of injury); Cruden, 957 F.2d at 977 (same). Also, that she was aware of the intra-company funding scheme at the time of the investments is not clearly undisputed. It may very well be that plaintiff is essentially alleging "that the individual defendants failed to adequately entice [her] to participate in a series of low-risk investment opportunities" which plaintiff should have known were clear corporate opportunities, and it may be that these activities do not amount to a "lengthy period of racketeering activity or a threat of continued criminal activity" from a common sense standpoint such as to impose civil liability under RICO. See Report, at 18. There may have been no duty to provide such information to plaintiff. Additionally, the Magistrate Judge is rightfully concerned with applying RICO to this family dispute. There should certainly exist genuine controls over how far civil RICO's reach should extend and over the types of activities governed by the statute. See generally Thurgood Marshall, Misinterpreting RICO, in The RICO Racket 59 (Nat'l Legal Center for the Public Interest, Sept. 1989); William H. Rehnquist, Reforming RICO, in The RICO Racket 63 (Nat'l Legal Center for the Public Interest, Sept. 1989). Nonetheless, the court finds that the Magistrate Judge should determine the remaining issues in the first instance.

 CONCLUSION

 Accordingly, the Court rejects the Magistrate Judge's February 26, 1993 Report and Recommendation and recommits the matter for further proceedings pursuant to 28 U.S.C. § 636(b)(1). The motion for summary judgment is denied.

 IT IS SO ORDERED.

 ENTER:

 CHARLES RONALD NORGLE, SR., Judge

 United States District Court

 DATED: April 2, 1993

 EXHIBIT A

 CAROL MARKS JACOBSOHN, Plaintiff, v. LOUIS MARKS, JERROLD MARKS, MARTIN ROSENFIELD, RICHARD ROSENFIELD, EVERGREEN THEATRE CORPORATION, FINE ARTS THEATRES, INC., HILLSIDE SQUARE THEATRES, INC., M&R THEATRES, INC., and its subsidiaries, NORRAN CORPORATION, OLD ORCHARD THEATRE CO., EVANSTON THEATRES, INC., HYDE PARK THEATRES, INC., DEARBORN THEATRES, INC., RIVER RUN THEATRES, INC., WEBSTER PLACE THEATRES, INC., and M&R MANAGEMENT CORPORATION, OLD ORCHARD CARWASH, INC., and LOEWS CHICAGO CINEMA, INC., Defendants.

 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION

 February 26, 1993, Decided

 [EDITOR'S NOTE: THIS DOCUMENT IS REPORTED AT 1993 U.S. Dist. LEXIS 2141.]


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