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RESOLUTION TRUST CORP. v. S & K CHEVROLET

November 8, 1994

RESOLUTION TRUST CORP., PLAINTIFF,
v.
S & K CHEVROLET, ET AL., DEFENDANTS.



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

ORDER

Initially, the Court notes that a complaint should not be dismissed unless it appears from the pleadings that the plaintiff could prove no set of facts in support of its claim which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In addition, for purposes of a motion to dismiss, the complaint is construed in the light most favorable to the plaintiff and its factual allegations are taken as true. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). Finally, a complaint must contain either direct or inferential allegations respecting all material elements necessary to sustain a recovery under some viable legal theory. Sutliff Inc. v. Donovan Cos., 727 F.2d 648 (7th Cir. 1984).

This case arises from an alleged scheme by Defendants to, through the use of misrepresentations and false dealings, secure financing from Security Savings and Loan Association ("Security") for persons who sought to purchase automobiles from S & K Chevrolet. Defendant S & K is a corporation which is in the business of selling new and used automobiles. With the exception of Defendant Reiman; all Defendants were either in the employ of S & K as salesmen, sales managers, and finance managers, or were owners of S & K. Defendant Reiman was an insurance agent for a national insurance company. S & K and Security had an agreement whereby S & K would submit loan applications to Security on behalf of potential S & K customers. Security would lend money to S & K customers if the customer met Security's lending criteria.

The alleged scheme perpetrated by Defendants involved, inter alia, the falsification of information on loan applications submitted to Security, misrepresentations concerning the existence and amount of down payments, misrepresentations concerning accessories on automobiles sold, misrepresentations as to the insurability of purchasers, and misrepresentations concerning the value of trade-ins and the purchase price of an automobile. This alleged scheme was carried out from August 1987 through June 1988. For the purposes of Count II, Plaintiffs RICO claim, the prohibited activities under 18 U.S.C. § 1962 are alleged to have continued from 1987 through at least 1990. Over 50% of the loans made by Security to S & K customers during this time period became delinquent, causing a substantial loss to Security. On August 17, 1989, the Office of Thrift Supervision ("the OTS") placed Security in receivership and appointed the RTC as receiver. The OTS simultaneously created a new institution, Security Federal Savings and Loan Association ("Security Federal"), to acquire certain assets and liabilities of Security, including third party claims of the type asserted in the present case. On August 17, 1990, the OTS appointed the RTC as receiver of Security Federal. It is in the capacity of receiver of Security Federal that the RTC brought the present suit on August 6, 1993.

The RTC's Complaint is in two counts. Count One asserts a claim for common law fraud. Count Two asserts a claim under the racketeer Influenced and Corrupt Organizations Act ("RICO") 18 U.S.C. § 1962 (a)-(d). Several Defendants filed Motions to Dismiss the RTC's Complaint. These motions challenged the Complaint on the basis of standing, statutes of limitations, and pleading inadequacies in both Counts One and Two. The Magistrate Judge found that the RTC has standing to pursue both claims, that the RTC's claims are not time barred, that Count One sufficiently pleads common law fraud, and that Count Two fails to allege sufficiently a "racketeering activity" and a "pattern." As noted above, both the RTC and various Defendants have filed objections to the Magistrate Judge's recommendation. The Court, therefore, shall consider seriatim the issues of standing, statutory time bars, and adequacy of the pleadings in Counts One and Two.

STANDING

The Magistrate Judge found in his Report and Recommendation that the RTC had standing to bring the present suit. In their Motions to Dismiss, Defendants argued that the RTC lacked standing because both its fraud and RICO claims are not assignable. Citing Freeman Coal Corp. v. Burton, 388 Ill. 604, 58 N.E.2d 589 (1944), the Magistrate Judge stated that, under Illinois law, an action for fraud transferred by the operation of law may be prosecuted. The Magistrate Judge, citing 12 U.S.C. § 1821 (d)(2)(A), noted that the RTC had taken control of its fraud claim by operation of law. As such, the Magistrate Judge found that the RTC's fraud claims were assignable. The Magistrate Judge also found that the RTC's RICO claims were assignable. The Magistrate Judge noted that all federal cases which have considered the matter have found RICO claims to be assignable, and stated that he found the reasoning those cases employed persuasive. Accordingly, the Magistrate Judge found that the RTC had standing to pursue its fraud and RICO claims.

Defendant Reiman filed an objection to the Magistrate Judge's recommendation regarding the issue of standing.*fn1 Reiman argues in his objection that the RTC did not take control of the assets of Security by operation of law, rather, it took control of Security Federal's assets by the operation of law. In turn, Reiman argues, Security Federal acquired the assets of Security through assignment. Therefore, Reiman reasons, the Court must determine the issue of standing on the basis of contractual assignment, not transfer by operation of law. Reiman continues that the RTC's cause of action for fraud is not assignable under Illinois law, and that the RTC's RICO claims are, similarly, not assignable.*fn2 The Court finds Reiman's arguments unpersuasive and that the Magistrate Judge's recommendation concerning the issue of standing should be adopted.

The RTC has standing to pursue its claims under both common law fraud and RICO. As the Magistrate Judge indicated in his recommendation, the Supreme Court of Illinois has, since Freeman Coal Corp. v. Burton, 388 Ill. 604, 58 N.E.2d 589 (1944), recognized that an action in fraud transferred by operation of law may be prosecuted. Contrary to Reiman's argument, it is clear that transfer of assets from Security to Security Federal and from Security Federal to the RTC were accomplished by operation of law. See 12 U.S.C. § 1821; cf Federal Deposit Ins. Carp. v. Shrader & York, 991 F.2d 216 (5th Cir. 1993) (FDIC found to have standing to bring malpractice suit). Security Federal was created by the OTS to receive the assets of Security. Subsequently, Security Federal was placed in receivership by the OTS, and the RTC was appointed receiver of Security Federal. Accordingly, the RTC has standing to pursue its state law fraud claim.

The RTC also has standing to pursue its RICO claim. Reiman attacks the Magistrate Judge's recommendation as to the assignability of a RICO claim by arguing that the Seventh Circuit would, if it were to confront this issue, decide against the assignability of RICO claims. In support of his argument, Reiman cites Smith v. No. 2 Galesburg Crown Finance Corp., 615 F.2d 407 (7th Cir. 1980) and Tellis v. United States Fidelity & Guaranty Co., 805 F.2d 741 (7th Cir. 1986). Reiman cites Smith for the general rule that actions for penalties do not survive the death of a plaintiff. In Smith, a case involving the Truth in Lending Act ("TILA"), a Seventh Circuit panel engaged in an analysis of whether TILA was penal or remedial when determining the survivability of a TILA claim. Reiman reasons that since Tellis found that a RICO action is penal in nature rather than remedial and based its decision as to survivability on that finding, the Seventh Circuit would likewise find against assignability of a RICO claim because it is penal in nature. The Court finds Reiman's argument to be without merit.

Initially, the Court notes a short-coming in Reiman's argument. Reiman cites Tellis, 805 F.24 741 (7th Cir. 1986) for the proposition that RICO is penal in nature. Reiman fails to bring to the Court's attention, however, the fact that this case has been vacated and remanded. 483 U.5 1015, 107 S.Ct. 3255, 97 L.Ed.2d 755 (1987).*fn3 In addition, the Court notes that the Supreme Court in Shearson/American Express, Inc. v. McMahon found the legislative history of RICO indicates that the treble damages provision in § 1964(c) serves the dual purposes of compensation and deterrence. 482 U.S. 220, 240-41, 107 S.Ct. 2332, 2344-45 96 L.Ed.2d 185 (1987). An analysis focusing upon whether RICO is remedial or penal is, however, unnecessary because the Court rejects the use of a penal/remedial dichotomy when determining whether RICO claims are assignable.

Lower federal courts which have addressed the issue of the assignability of RICO claims have universally found that they are assignable. See Nicolls Pointing Coulson, Ltd. v. Transp. Underwriters of La., 777 F. Supp. 493 (E.D.La. 1991); Federal Ins. Co. v. Parello, 767 F. Supp. 157 (N.D.Ill. 1991); Federal Ins. Co. v. Ayers, 760 F. Supp. 1118 (E.D.Pa. 1990); In re Nat'l Mortgage Equity Corp. Mortgage Pool Certificate Sec. Litigation, 636 F. Supp. 1138 (C.D.Cal. 1986). These courts have rejected the use of a remedial/penal analysis in deciding the assignability of RICO claims. Instead, these courts analogized RICO to the Clayton Act and found that since RICO is closely associated with the Clayton Act and claims under the Clayton Antitrust Act are assignable, claims under RICO should also be assignable. Id. The Court adopts the reasoning employed by these courts, and, therefore, finds that RICO claims may be assigned. Accordingly, Plaintiff has standing to pursue both its fraud claim based upon state law and its claim under RICO.

STATUTES OF LIMITATION

The Magistrate Judge held in his Report and Recommendation that Plaintiff had timely filed its common law fraud and RICO claims. The Magistrate Judge found that the statutes of limitations for Plaintiff's fraud and RICO claims were five and four years, respectively. This finding is not objected to by any of the parties. The Magistrate Judge also found that pursuant to 12 U.S.C. § 1821(d)(14), Plaintiff's claims began to run anew on the date the RTC was appointed receiver of Security, August 17, 1989, that the fraud and RICO claims were viable on that date, that Plaintiff had five and four years from that date to file its fraud and RICO claims, respectively, and that the Complaint in this case was filed August 6, 1993, well within these respective periods. The Magistrate Judge therefore found that Plaintiffs claims were not time barred.

Initially, the Court notes that neither the Magistrate Judge nor the parties considered § 1821(d)(14) in its entirety. Specifically, the Magistrate Judge's recommendation failed to consider the language of § 1821(d)(14)(A)(ii) which, as amended in 1993, refers to 12 U.S.C. § 1441a(b)(14). See, 1994 Cumulative Annual Pocket Part of Title 12 Banks and Banking ...


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