United States District Court, Central District of Illinois, Peoria Division
February 28, 1996
RESOLUTION TRUST CORPORATION, AS RECEIVER FOR SECURITY FEDERAL SAVINGS AND LOAN ASSOCIATION, PLAINTIFF,
S & K CHEVROLET COMPANY; DAVID ANGEVINE, A/K/A DAVID ALEX; DUANE ANGEVINE; CAL COLLINS; TONY CONSTIBLE; RAY COUNTS; WALT DURDLE; ART ENTURO, JR.; BERNIE ESCAMILLA; JIM HAINES; AL HETH; AL HUNT; WILLIAM KALLISTER; KEVIN KALLISTER, MATT MATTHEWS; GARY PARKINSON; MONTY RAYMOND; RANDY REIMAN; BOB RHINES; THOMAS SMITH, SR.; DAVE STANFEL; HAROLD STAFFORD; AND DAN STEWART, DEFENDANTS.
The opinion of the court was delivered by: McDADE, District Judge.
Before the Court are the Objections of Defendant Randy Reiman to the
Magistrate's Report and Recommendation [Doc. # 139]. The facts in this
case are set forth in the Court's previous Order dated November 8, 1994,
and will only be summarized here. On August 6, 1993, Plaintiff Resolution
Trust Corporation ("RTC"), filed a two-count Complaint against various
Defendants alleging common law fraud (Count I) and violations of the
Racketeer Influenced and Corrupt Organizations Act (RICO) (Count II).
According to the Complaint, Security Savings and Loan Association
("Security") was a federally chartered savings and loan association
located in Peoria, Illinois. On August 17, 1989, the Office of Thrift
Supervision ("OTS") placed Security into receivership and appointed RTC
as receiver of Security. Simultaneously, the OTS created a new
institution, Security Federal Savings and Loan Association ("Security
Federal") to acquire all deposits and certain assets and liabilities of
Security. On August 17, 1990, OTS appointed RTC as receiver of Security
Federal. RTC filed the August 6, 1993, Complaint on behalf of Security
Defendant Randy Reiman ("Reiman") was an insurance agent for a national
insurance company. Reiman was allegedly involved in a scheme to
fraudulently secure financing
from Security for persons who sought to purchase automobiles from S & K
Chevrolet. In an Order dated November 8, 1994, the Court denied
Defendants' motion to dismiss Count I (common law fraud) but granted the
motion to dismiss Count II (RICO). Resolution Trust Corp. v. S & K
Chevrolet, et at., 868 F. Supp. 1047 (C.D.Ill. 1994). In dismissing Count
II, the Court reasoned that bank fraud could not be retroactively applied
as a predicate act under RICO. Id. at 1062-63. Thus, because the RICO
claim relied solely upon bank fraud to establish a pattern of
racketeering activity, the claim had to be dismissed. Id.
However, the Court also found that absent any concerns about
retroactivity, Plaintiffs' bank fraud claims would have sufficiently
established a "pattern" under the RICO statute by alleging "open-ended
continuity." Id. at 1061. Apparently encouraged by this holding,
Plaintiff filed a First Amended Complaint which asserted allegations of
mail fraud in Count II to replace the bank fraud allegations as predicate
acts under RICO. Defendant Reiman filed a motion to dismiss both counts
of the First Amended Complaint [Doc. # 106]. Magistrate Judge Kauffman
denied Defendant's motion to dismiss on the basis that he could find no
new arguments that were not already presented and rejected by the Court
in its previous Order of November 8, 1994.
Reiman filed objections from the Magistrate Judge's Report and
Recommendation on the basis that the following five grounds had not been
previously decided by this Court:
(1) Whether Plaintiff has standing to prosecute a
cause of action for punitive damages under Illinois
(2) Whether Plaintiff has sufficiently alleged mail
fraud as a pattern of racketeering activity.
(3) Whether Plaintiff has standing to prosecute a
claim for violation of 18 U.S.C. § 1962(a) and
§ 1962(b) or for conspiracy under § 1962(d)
to violate § 1962(a) or § 1962(b);
(4) Whether Plaintiff has sufficiently alleged a
violation of 18 U.S.C. § 1962(c); and
(5) Whether Plaintiff has sufficiently alleged
a conspiracy under § 1962(d) to violate
§ 1962(a), (b)or (c).
Because the Court agrees with Reiman that it has not previously decided
it will now reach the merits of his objections.
The Court shall make a de novo determination of those portions of the
Report and Recommendation to which objection has been made.
28 U.S.C. § 636(b)(1)(C). In analyzing a motion to dismiss for
failure to state a claim under Fed.R.Civ.P. 12(b)(6), the Court must take
the well-pleaded allegations of the Complaint as true and draw all
reasonable inferences in favor of the plaintiff. Baxter Healthcare Corp.
v. O.R. Concepts, Inc., 69 F.3d 785, 787 (7th Cir. 1995). Such a motion
will only be granted where it appears beyond a doubt that the plaintiff
can prove no set of facts in support of his claim which would entitle him
to relief. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80
(1957); Lashbrook v. Oerkfitz, 65 F.3d 1339, 1343 (7th Cir. 1995). 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,
654 (7th Cir. 1984). Moreover, Fed. R.Civ.P. 9(b) requires that "all
averments of fraud . . . shall be stated with particularity."
In Count I, Plaintiff RTC has alleged common law fraud and requested
both compensatory and punitive damages. Reiman argues that Plaintiff does
not have standing to prosecute a cause of action for punitive damages
under Illinois law. This argument is based on the notion that under
Illinois law, punitive damages do not survive the death of the
claimant. By analogy, Reiman asserts that the dissolution of a
corporation, such as Security or Security Federal, prevents RTC from
requesting punitive damages on behalf of those now defunct corporations.
A preliminary question is whether a corporation can maintain any cause
of action under Illinois law after it has been dissolved. The answer is
that it can, but only to the extent that Illinois statutes allow it to do
so. See Chicago Title & Trust Co. v. Forty-One Thirty-Six
Wilcox Bldg. Corp., 302 U.S. 120, 125, 58 S.Ct. 125, 127, 82 L.Ed. 147
(1937); People v. Mazzone, 74 Ill.2d 44, 23 Ill.Dec. 76, 79,
383 N.E.2d 947, 950 (1978). The applicable statute here is contained in
Article 12 of the Illinois Business Corporation Act:
The dissolution of a corporation . . . shall not
take away nor impair any civil remedy available to
or against such corporation, its directors, or
shareholders, for any right or claim existing, or
any liability incurred, prior to such dissolution if
action or other proceeding thereon is commenced
within five years after the date of such
805 ILCS 5/12.80 (1993). Because RTC filed suit on August 6, 1993, this
was within the five year limitations period for the dissolution of both
Security and Security Federal and the fraud claim is viable.
This brings the Court to the crux of Defendant's argument: whether a
punitive damages claim can survive the death of the claimant. The Illinois
Supreme Court has held that it cannot, Froud v. Celotex Corp.,
98 Ill.2d 324, 74 Ill.Dec. 629, 634, 456 N.E.2d 131, 136 (1983);
Mattyasovszky v. West Towns Bus Co., 61 Ill.2d 31, 330 N.E.2d 509, 510
(1975), unless a statute or regulatory scheme expressly authorizes a
punitive damages award. National Bank of Bloomington v. Norfolk & Western
Ry. Co., 73 Ill.2d 160, 23 Ill.Dec. 48, 383 N.E.2d 919 (1978) (Public
Utilities Act). Courts have read the exception in National Bank very
narrowly. See, e.g., Duncavage v. Allen, 147 Ill. App.3d 88, 100
Ill.Dec. 455, 463-64, 497 N.E.2d 433, 441-42 (1st Dist. 1986), appeal
denied, 113 Ill.2d 573, 106 Ill.Dec. 46, 505 N.E.2d 352 (1987) (holding
that the Illinois Consumer Fraud Act does not form a statutory basis for
survival of the award because it "does not explicitly authorize punitive
damages"); Poole v. Alpha Therapeutic Corp., 698 F. Supp. 1367, 1373
(N.D.Ill. 1988) (holding that the Blood Labeling Liability Act and the
Illinois Food, Drug and Cosmetic Act does not provide for survival of
punitive damages because they do not "expressly authorize" them).
There is little reason to believe that the Illinois Supreme Court's
holdings regarding the unavailability of punitive damages after the death
of a person do not also apply to the dissolution of a corporation. See
Chicago Title, 302 U.S. at 125, 58 S.Ct. at 127 ("[The corporation's]
dissolution puts an end to its existence, the result of which may be
likened to the death of a natural person"); Oklahoma Nat. Gas Co. v.
Oklahoma, 273 U.S. 257
, 259, 47 S.Ct. 391, 392, 71 L.Ed. 634 (1927)
("[A]s the death of the natural person abates all pending litigation to
which such a person is a party, dissolution of a corporation at common
law abates all litigation in which the corporation is appearing either as
plaintiff or defendant"); Mazzone, 23 Ill.Dec. at 79, 383 N.E.2d at 950
("[T]he dissolution of a corporation is analogous to the death of an
In Grunloh v. Effingham Equity, Inc., 174 Ill. App.3d 508, 124
Ill.Dec. 140, 146-47, 528 N.E.2d 1031, 1037-38 (4th Dist. 1988), appeal
denied, 123 Ill.2d 557, 128 Ill.Dec. 890, 535 N.E.2d 401 (1988), the
court applied the Illinois Supreme Court's analysis regarding the
survival of punitive damages claims to the dissolution of a corporation.
The court found that the corporation's claims for punitive damages were
not part of a regulatory or statutory scheme and thus found that they
would not survive at common law. Id. 124 Ill.Dec. at 147, 528 N.E.2d at
1038. The court concluded that because the punitive damages could not
survive the dissolution of the corporation, they also were not assignable
by the corporation. Id.
Here, too, it would appear that the Illinois Supreme Court's holdings
in Froud, 74 Ill. Dec. at 634, 456 N.E.2d at 136, and Mattyasovszky, 330
N.E.2d at 510, dictate that Security's punitive damages claim does not
survive the dissolution of that corporation under
Illinois law. Plaintiff has not cited to any statutory provision or
regulatory scheme pursuant to National Bank which would allow the
assignment of such a claim to RTC after Security's dissolution.
Instead, Plaintiff tries a different tack by arguing that Illinois law
on this issue is preempted by federal law, namely, the Financial
Institutions Reform, Recovery, and Enforcement Act ("FIRREA") which
The [Federal Deposit Insurance] Corporation shall, as
conservator or receiver, and by operation of law,
(i) all rights, titles, powers and privileges of the
insured depository institution, and of any
stockholder, member, accountholder, depositor,
officer, or director of such institution with
respect to the institution and the assets of the
12 U.S.C. § 1821(d)(2)(A)(i).
This exact provision was analyzed by the United States Supreme Court in
O'Melveny & Myers v. Federal Deposit Ins. Corp., ___ U.S. ___,
___, 114 S.Ct. 2048, 2054, 129 L.Ed.2d 67 (1994). The Court held that
FIRREA displaces state law with federal rules of decision only where
there is "an explicit federal statutory provision," or in those "few and
restricted" cases where there is a "significant conflict between some
federal policy or interest and the use of state law." Id. at — -
—, 114 S.Ct. at 2054-55. The Court then stated:
Respondent argues § 1821(d)(2)(A)(i) should be
read as a nonexclusive grant of rights to the FDIC
receiver, which can be supplemented or modified by
federal common law; and that FIRREA as a whole, by
demonstrating the high federal interest in this area,
confirms the courts' authority to promulgate such
common law. This argument is demolished by those
provisions of FIRREA which specifically create special
federal rules of decision regarding claims by, and
defenses against, the FDIC as receiver. . . . Inclusio
unius, exclusio alterius. It is hard to avoid the
conclusion that § 1821(d)(2)(A)(i) places the FDIC
in the shoes of the insolvent S & L, to work out its
claims under state law, except where some provision in
the extensive framework of FIRREA provides otherwise.
To create additional "federal common-law" exceptions
is not to supplement this scheme, but to alter it.
Id. at — 114 S.Ct. at 2054 (internal citations omitted).
Plaintiff relies upon Resolution Trust Corp. v. Liebert,
871 F. Supp. 370, 373 (C.D.Cal. 1994), in which the district court found
that FIRREA section § 1821(d)(2)(A)(i) did preempt California law
regarding the transfer of punitive damages:
Defendants contend that the RTC is prohibited from
succeeding to the failed S & L's claim for punitive
damages on the state law claims because of
California's rule against transfer of punitive damage
claims. . . . [T]he federal rule of decision
supplanting California law is found in FIRREA.
12 U.S.C. § 1821(d)(2)(A)(i) is a federal statute
under which the RTC succeeds to "all rights, title,
powers, and privileges of the insured depository
institution." There is no reason to read Westport's
right to punitive damages out of this sweeping
provision. California law created certain punitive
damage rights Westport had at the time of
receivership. Section 1821(d)(2)(A)(i) preempts
California's rules regarding whether the RTC can
succeed to those state-created rights.
(internal citations omitted).
However, the district court's decision in Liebert is distinguishable
from the instant case. In Liebert, California law prevented the
assignment of punitive damages even during the lifetime of the victim
because they were deemed personal to the one injured. See People v.
Superior Court of Los Angeles County, 9 Cal.3d 283, 107 Cal.Rptr. 192,
195, 507 P.2d 1400, 1403 (1973) (en banc). Thus, when the bank went into
receivership to RTC, it still had the state-created right to a punitive
damages claim, albeit a nonassignable right under state law. The district
court properly held that § 1821(d)(2)(A)(i) preempted California's
rules regarding the assignment of such claims. 871 F. Supp. at 373.
By contrast, in the instant case, Illinois law prevents the assignment
of a punitive damage claim after the dissolution of a corporation.
Froud, 74 Ill.Dec. at 634, 456 N.E.2d at 136; Mattyasovszky, 330 N.E.2d
at 510. Because Security and Security Federal were already defunct
corporations when they went into receivership to RTC,*fn2 Illinois law
no longer provided a state-created right to a punitive damages claim at
that point in time. Thus, unlike the situation in Liebert, §
1821(d)(2)(A)(i) cannot be invoked to preempt state law where the state
property interest did not even exist at the time of receivership. To
invoke such an interest here under the federal common law would violate
the holding in O'Melveny. RTC stepped into the shoes of a defunct
corporation without any right to punitive damages. O'Melveny, ___
U.S. at ___, 114 S.Ct. at 2054. Thus, the Court finds that Illinois
law is not preempted by FIRREA and RTC's punitive damages claim must be
dismissed under Illinois law.
Defendant asserts a number of objections regarding Plaintiff's RICO
claim*fn3 in Count II: (1) Plaintiff's allegations of mail fraud do not
establish sufficient predicate acts to form a "pattern of racketeering
activity" under RICO; (2) Plaintiff lacks standing under §§ 1962(a),
(b), and (d) because it has not shown any injury caused by the RICO
activity; (3) Plaintiff has not sufficiently alleged a violation of
§ 1962(c); and (4) Plaintiff has not sufficiently alleged a
conspiracy under § 1962(d). The Court will analyze each of these
arguments in turn.
Pattern of Racketeering Activity
Defendant asserts that Plaintiff's allegations of mail fraud do not
establish sufficient predicate acts to form a "pattern of racketeering
activity" under RICO. In H.J., Inc. v. Northwestern Bell Tel. Co.,
492 U.S. 229, 236-43, 109 S.Ct. 2893, 2899, 106 L.Ed.2d 195 (1989), the
Supreme Court held that in addition to showing at least two predicate
acts, a plaintiff, to establish pattern, must show that the predicate
acts are related*fn4 and continuous. "Continuity" is a concept which may
be either closed or openended, "referring either to a closed period of
repeated conduct, or to past conduct that by its nature projects into the
future with a threat of repetition." Id. at 241, 109 S.Ct. at 2902.
In the Court's previous Order of November 8, 1994, the Court focused
upon the bank fraud allegations of Plaintiff's original Complaint and
found that they did not sufficiently allege a pattern of closed-ended
continuity. Resolution Trust, 868 F. Supp. at 1060. However, the Court
noted that open-ended continuity may be found to exist if: (1) a specific
threat of repetition exists; (2) the predicate acts are a regular way of
conducting an ongoing legitimate business; or (3) the predicate acts can
be attributed to a defendant operating as part of a long-term association
that exists for criminal purposes. Id. citing Northwestern Bell, 492
U.S. at 242-43, 109 S.Ct. at 2902. The Court held that the bank fraud
scheme did establish open-ended continuity, reasoning:
[T]he scheme in the present case had no natural ending
point. Defendants were capable of repeating their
alleged schemes indefinitely into the future. Indeed,
but for the financial difficulties experienced by
Security which resulted in it being placed in
receivership, Defendants may well have
continued to repeat their alleged schemes when dealing
with both Security and other lending institutions. In
addition . . . Defendants' continued control of and
participation in the business threatened a
continuation of the sort of criminal acts alleged in
the Complaint. Finally, procuring financing for buyers
of its automobiles is a regular way of conducting
business for Defendants. Allegations of bank fraud to
procure these loans would make the predicate offenses
a regular way of conducting business. . . .
Accordingly, Plaintiff has alleged facts necessary to
establish a specific threat of repetition and that the
predicates are a regular way of conducting Defendants'
business. The Court finds that for the purposes of a
motion to dismiss Plaintiff has sufficiently
established open-ended continuity, and therefore,
Id. at 1061 (internal citations omitted).
The Court's task now is to determine whether replacing the bank fraud
allegations of the original Complaint with the mail fraud allegations in
the Amended Complaint changes the Court's analysis regarding openended
continuity. It does not. Defendant argues that Plaintiff's failure to
expressly allege facts in the Amended Complaint which support the threat
of future harm indicates that open-ended continuity does not exist.
Defendant points out that neither the original nor the Amended Complaint
expressly alleges that bank fraud or wire fraud were a regular way of
doing business, or that the alleged schemes would have continued into the
future had Security not gone out of business.
However, a complaint need only contain direct or inferential
allegations respecting all material elements necessary to sustain a
recovery under some viable legal theory. Sutliff, 727 F.2d at 654. In
addition, the Court must draw all reasonable inferences in favor of the
plaintiff. Baxter Healthcare, 69 F.3d at 787. Here, the Amended Complaint
sets forth sufficient factual allegations from which it may be inferred
that mail fraud was a regular way of conducting business for Defendants.
Surely, an automobile dealership like S & K regularly mails motor vehicle
insurance binders, certificates, and termination notices to its customers
as well as motor vehicle titles and certificates of origin to the
Illinois Secretary of State. It is also normal for the Secretary of State
to send out new titles on these cars and for an insurance company to mail
credit life insurance certificates.
Moreover, even though Security remained in operation until August 17,
1989 — over one year after the last alleged incident of mail fraud*fn5
— this fact alone does not preclude the inference that
Defendants' scheme might have continued into the future after this
hiatus. In a motion to dismiss, the Court must draw all reasonable
inferences in favor of the plaintiff. Baxter Healthcare, 69 F.3d at 787.
Under this liberal pleading standard, the Court cannot say that
Defendants' mail fraud scheme came to an absolute halt in May of 1988.
Lastly, Reiman argues that there are no specific factual allegations
pursuant to Rule 9(b) which show that Defendants defrauded any financial
institutions or engaged in mail fraud directed to any person aside from
Security. It is true that the vaguely worded phrase, "Defendants devised
a series of schemes to defraud Security and other financial
institutions," is not enough to meet the specificity requirement of Rule
9(b). However, the "other financial institutions" language is not
necessary to allege a RICO violation and thus cannot be dispositive of
Count II. While the number of victims bears on the analysis of
closed-ended continuity, Morgan v. Bank of Waukegan, 804 F.2d 970, 975
(7th Cir. 1986), there appears to be no corresponding factor with regard
to openended continuity. There must be two predicate acts under RICO, not
two victims. Therefore, the Court finds that a pattern of racketeering
activity has been adequately alleged here.
Reiman raises the issue of Plaintiff's standing to maintain a claim
under 18 U.S.C. § 1962(a), (b) or (d).*fn6 First, Defendant argues
that § 1962(a) requires Plaintiff to allege that it was injured by
the use or investment of Defendants' racketeering income, rather than by
the predicate acts themselves. The Seventh Circuit has yet to decide
whether such an allegation is necessary to sustain an action under §
1962(a), Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 779
n. 6 (7th Cir. 1994), and the district courts in the Circuit are split on
In Sedima v. Imrex Co., Inc., 473 U.S. 479, 495, 105 S.Ct. 3275, 3284,
87 L.Ed.2d 346 (1985), which involved a violation of § 1962(c), the
United States Supreme Court held:
[W]e perceive no distinct "racketeering injury"
requirement. Given that "racketeering activity"
consists of no more and no less than commission of a
predicate act, § 1961(1), we are initially
doubtful about a requirement of a "racketeering
injury" separate from the harm from the predicate
acts. A reading of the statute belies any such
requirement. Section 1964(c) authorizes a private suit
by "[a]ny person injured in his business or property
by reason of a violation of § 1962." Section 1962
in turn makes it unlawful for "any person" — not
just mobsters — to use money derived from a
pattern of racketeering activity to invest in an
enterprise, to acquire control of an enterprise
through a pattern of racketeering activity, or to
conduct an enterprise through a pattern of
racketeering activity. §§ 1962(a)-(c). If the
defendant engages in a pattern of racketeering
activity in a manner forbidden by these provisions,
and the racketeering activities injure the plaintiff
in his business or property, the plaintiff has a claim
under § 1964(c). There is no room in the statutory
language for an additional, amorphous "racketeering
See also American Nat'l Bank & Trust Co. of Chicago v. Haroco, Inc.,
473 U.S. 606, 609, 105 S.Ct. 3291, 3292, 87 L.Ed.2d 437 (1985) ("The
submission that the injury must flow not from the predicate acts
themselves but from the fact that they were performed as part of the
conduct of an enterprise suffers from the same defects as the amorphous
and unfounded restrictions on the RICO private action we rejected in
The Fourth Circuit in Busby v. Crown Supply, Inc., 896 F.2d 833, 839
(4th Cir. 1990), relied upon Sedima and Haroco to reject the "investment
use" rule in regard to claims arising under § 1962(a). That rule
states that a cause of action under § 1962(a) may only be established
where the' alleged injury flows from the defendant's investment or use of
the income, and not from the harm suffered by the commission of the
predicate acts themselves. Id. at 836. The Fourth Circuit reasoned,
"Although the complaints in Sedima and Haroco were filed under §
1962(c), it is clear that the Supreme Court was referring to § 1962
as a whole in both cases, and in fact cited § 1962(a) and the offense
it defines in Sedima." Id. at 839. Because the Supreme Court in Sedima
and Haroco found that there was no requirement of a racketeering injury,
the Fourth Circuit in Busby applied those holdings to negate the injury
requirement under § 1962(a). Id.
However, all of the other circuit courts of appeals which have reached
this issue have rejected the application of Sedima and Haroco to claims
arising under § 1962(a) and have adopted the "investment use" rule
instead. See Nugget Hydroelectric, L.P. v. Pacific Gas and Elec. Co.,
981 F.2d 429, 437 (9th Cir. 1992), cert. denied, 508 U.S. 908, 113 S.Ct.
2336, 124 L.Ed.2d 247 (1993); Parker & Parsley Petroleum Co. v. Dresser
Indus., 972 F.2d 580, 584 (5th Cir. 1992); Danielsen v. Burnside-Ott
Aviation Training Center,
Inc., 941 F.2d 1220, 1230 (D.C.Cir. 1991); R.R. Brittingham v. Mobil
Corp., 943 F.2d 297, 304 (3d Cir. 1991); Craighead v. E.F. Hutton & Co.,
Inc., 899 F.2d 485, 494 (6th Cir. 1990); Ouaknine v. MacFarlane,
897 F.2d 75, 82-83 (2d Cir. 1990); Grider v. Texas Oil & Gas Corp.,
868 F.2d 1147, 1150 (10th Cir.), cert. denied, 493 U.S. 820, 110 S.Ct.
76, 107 L.Ed.2d 43 (1989).
These courts reason that the civil remedy created by § 1964(c)
authorizes recovery only for injury "by reason of" the specific RICO
violation at issue. See Sedima, 473 U.S. at 496, 105 S.Ct. at 3285
(holding that the injury required by § 1964(c) must be caused "by the
conduct constituting the violation."). The broad language of §
1962(c) merely requires that a defendant "conduct or participate" in
racketeering activity. Thus, a § 1962(c) violation may be found under
§ 1964(c) without alleging any specific injury, as the Supreme Court
held in Sedima and Haroco. By contrast, the specific language of §
1962(a) requires that a defendant "use or invest . . . any part of such
income" in an enterprise. Thus, a violation of § 1962(a) plainly
requires that a plaintiff prove that his injury flowed from the
defendant's use or investment of racketeering income. Indeed, it would be
illogical to hold that a predicate act injury is sufficient to provide a
plaintiff with standing under both sections 1962(a) and 1962(c). If that
were true, there would be no reason for Congress to have passed both
provisions. See Danielsen, 941 F.2d at 1230; Pinski v. Adelman, 1995 WL
669101, at *8 (N.D.Ill. Nov. 7, 1995).
This Court agrees with the reasoning and weight of the majority of
circuit courts of appeals and district courts in the Seventh Circuit
which hold that a plaintiff must allege that he was injured by the
defendant' s use or investment of the racketeering income in order to
state a claim under § 1962(a).*fn7 For the same reason, the Court
finds that in order to state a claim under § 1962(b), a plaintiff
must allege that he was injured by the defendant's acquisition or
maintenance of an interest in the enterprise. See Danielsen, 941 F.2d at
1231; Old Time Enterprises v. International Coffee Corp., 862 F.2d 1213,
1219 (5th Cir. 1989); Fujisawa Pharmatceutical Co., Ltd. v. Kapoor,
814 F. Supp. 720, 735 (N.D.Ill. 1993). Moreover, where a conspiracy claim
under § 1962(d) is premised upon a violation of § 1962(a) or (b)
that has failed to allege a sufficient injury, that claim must also be
dismissed for failure to state a claim. See Craighead, 899 F.2d at 495;
Grider, 868 F.2d at 1151.
In the instant case, Plaintiff's Amended Complaint fails to allege an
injury stemming from the use or investment of racketeering activity under
§ 1962(a) or arising from the acquisition or maintenance of an
enterprise through racketeering activity pursuant to § 1962(b).
Thus, the Court finds that Plaintiff lacks standing to bring a claim
under § 1962(a), § 1962(b), and any § 1962(d) conspiracy
allegations which are premised upon them.
Failure to State a Claim Under § 1962(c)
Reiman asserts that Plaintiff's Complaint fails to state a claim
against him under § 1962(c) because it does not establish that he
participated in the conduct of the affairs of the enterprise. Section
1962(c) makes it unlawful "for any person employed by or associated with
any enterprise, engaged in, or the activities of which affect, interstate
or foreign commerce, to conduct or participate, directly or indirectly,
in the conduct of such enterprise's affairs through a pattern of
racketeering activity." 18 U.S.C. § 1962(c).
The United States Supreme Court in Reves v. Ernst & Young, 507 U.S. 170,
178-80, 113 S.Ct. 1163, 1170, 122 L.Ed.2d 525 (1993), held that §
1962(c) requires that the defendant play "some part in directing the
enterprise's affairs." The Court adopted the "operation or management"
test of the Eighth Circuit in order to apply this principle. Under this
test, a RICO enterprise may be operated by: (1) upper management; (2)
lower-rung participants in the enterprise who are under the direction of
or (3) others associated with the enterprise who exert control over it,
as for example, by bribery. Id. at 184, 113 S.Ct. at 1173; MCM Partners,
Inc. v. Andrews-Bartlett & Assoc., Inc., 62 F.3d 967, 977 (7th Cir. 1995)
citing Azrielli v. Cohen Law Offices, 21 F.3d 512, 521 (2d Cir. 1994). In
regard to the third category, the Court in Reves explained:
§ 1962(c) cannot be interpreted to reach complete
"outsiders" because liability depends on showing that
the defendants conducted or participated in the
conduct of the "enterprise's affairs," not just their
own affairs. Of course, "outsiders" may be liable
under § 1962(c) if they are "associated with" an
enterprise and participate in the conduct of its
affairs — that is, participate in the operation
or management of' the enterprise itself.
507 U.S. at 185, 113 S.Ct. at 1173.
A person who is included in the complaint's definition of an enterprise
is more likely to be found to exert some control over the enterprise.*fn8
See, e.g., MCM, 62 F.3d at 979 (holding that the "primary fact" leading
to the conclusion that certain individuals were lower-rung participants
in the enterprise, rather than outsiders, was that the complaint alleged
them to be members of the enterprise itself); Brown v. LaSalle Northwest
Nat'l Bank, 820 F. Supp. 1078, 1082 (N.D.Ill. 1993) (holding that
defendant named in complaint as part of enterprise satisfied the standard
set forth in Reves).
However, where the "person" is distinct from the alleged "enterprise"
itself, the lower courts appear to be split about the level of
participation required to exercise control over the enterprise's affairs.
As the Third Circuit explained in University of Maryland at Baltimore v.
Peat, Marwick, Main & Co., 996 F.2d 1534, 1539 (3d Cir. 1993):
Simply because one provides goods and services that
ultimately benefit the enterprise does not mean that
one becomes liable under RICO as a result. There must
be a nexus between the person and the conduct in the
affairs of an enterprise. The operation or management
test goes to that nexus. In other words, the person
must knowingly engage in "directing the enterprise's
affairs" through a pattern of racketeering activity.
Reves, 508 U.S. at 178, 113 S.Ct. at 1170.
District courts in the Seventh Circuit have held that the participation
requirement of Reves is not satisfied where the outsider merely supplies
goods or services to the enterprise. See, e.g., Arenson v. Whitehall
Convalescent and Nursing Home, Inc., 880 F. Supp. 1202, 1209 (N.D.Ill.
1995) ("Allegations of a simple supplier-purchaser relationship are
insufficient to allege that Whitehall participated in the operation or
management of Weber."); A.I. Credit Corp. v. Hartford Computer Group,
Inc., 847 F. Supp. 588, 601-02 (N.D.Ill. 1994) (outside brokers who
provided financial services for the enterprise did not exercise sufficient
control over the enterprise); Sassoon v. Altgelt 777, Inc.,
822 F. Supp. 1303, 1307 (N.D.Ill. 1993) (providing outside legal services
to the enterprise is not sufficient to meet the Reves operation or
The more difficult cases arise when the outsider does something more
than merely provide goods or services to the enterprise. Thus, in Davis
v. Mutual Life Ins. Co. of New York, 6 F.3d 367, 380 (6th Cir. 1993),
cert. denied, ___ U.S. ___, 114 S.Ct. 1298, 127 L.Ed.2d 650
(1994), a life insurance company (MONY) was found to have "continued to
allow, if not actively encourage[d]" Fletcher, the head of the
enterprise, to carry on with his scheme. The evidence at trial revealed a
"virtual smoking gun: an internal report, prepared by a MONY attorney
during negotiations between MONY and Fletcher, that described Fletcher's
program in detail, calling it a `fast-track hustle.'" Id. at 374. Although
the report advised company officials that the scheme violated the law,
the company appointed Fletcher as its insurance agent and sales manager.
Id. at 374-75. In addition, the company's management personnel
participated in training workshops for Fletcher's organization and
recruited its own
employees to work in the combined tax and insurance program. Id. at 375.
The company also ignored warnings from numerous policyholders that
Fletcher was conducting a "con game" or "scam." Id. For these reasons,
the court concluded that MONY "exercised sufficient control over the
affairs of the RICO enterprise to withstand scrutiny under Reves."*fn9
Id. at 380.
Similarly, in Aetna Casualty Surety Co. v. P & B Autobody, 43 F.3d 1546
1559 (1st Cir. 1994), the plaintiff insurance company (Aetna) was the
RICO "enterprise" and the defendants were individuals who had submitted
fraudulent insurance claims to Aetna. The First Circuit found that the
participation test in Reves had been met:
Appraising allegedly damaged vehicles and
investigating, processing, and paying automobile
insurance claims are vital parts of Aetna's business.
By acting with purpose to cause Aetna to make payments
on false claims, appellants were participating in the
"operation" of Aetna. . . . Appellants' activities
caused Aetna employees having authority to do so to
direct that other employees make payments Aetna
otherwise would not have made. . . . The evidence was
sufficient to support a finding that each of the
appellants participated in the conduct of Aetna's
affairs in this way. . . . [T]he evidence supports a
finding that appellants caused the Aetna appraisers to
approve false claims and conduct their appraisals in a
manner contrary to Aetna's business practices and
caused Aetna to pay out large sums of money on false
claims. The evidence was sufficient to support a
finding that appellants exerted control over the
enterprise, if not by bribery (the example given by
the Court in Reves), then at least by other methods of
inducement. . . . [T]he appellants' actions could be
found to have satisfied the "operation or management"
Id. at 1559-60.
In the instant case, the Court finds that Plaintiff's Complaint fails
to adequately allege the participation of Reiman in the management or
operation of the alleged enterprise, S & K Chevrolet. Reiman is not
alleged to be a manager or employee of S & K; rather, he is an outside
insurance agent who provided services to S & K during the course of its
alleged scheme to defraud. The Complaint alleges that Reiman provided
insurance binders in exchange for money from S & K even though he knew
that the borrowers were highly unlikely to maintain their insurance
premiums. Complaint ¶¶ 19, 49, 50. As a result of Reiman's issuance of
these binders, Plaintiff was induced to believe that the borrower would
secure permanent coverage for the vehicle. However, Reiman would later
cancel the binders without informing Plaintiff that they had been
cancelled. Complaint at ¶ 49-50. Thus, Reiman played a crucial role in
inducing Plaintiff to provide financing for the enterprise.
Plaintiff argues that Reiman's participation in the scheme is akin to
that of the defendants in Davis and Aetna and thus should meet the
operation or management test articulated in Reves. However, the Court
believes that these cases are distinguishable. In Davis, the defendant
insurance company was not only involved with the enterprise's scheme to
defraud; it also had a relationship with Fletcher, the organizer of the
enterprise, as well as the employees and agents of the enterprise, that
affected the direction of the enterprise itself. Thus, the company
ignored an internal report which advised it that the scheme was unlawful
and instead appointed Fletcher as its own insurance agent and sales
manager. 6 F.3d at 374-75. The company also sent its own management
personnel to participate in training workshops for the enterprise and
recruited the enterprise's employees to work in the combined tax and
insurance program. Id. at 375. These circumstances are not present in the
instant case. The Complaint does not allege that Reiman appointed the
head of S & K as
its agent, nor did he participate in training workshops with S & K's
Likewise, Aetna is distinguishable because in that case, the enterprise
was the victim of the fraudulent scheme. 43 F.3d at 1559. The defendants'
submissions of fraudulent claims "caused Aetna employees having authority
to do so to direct that other employees make payments Aetna otherwise
would not have made." Id. Because those false submissions actually caused
the enterprise's employees to take some action, the participation
requirement of Reves was met. Id. at 1560. By contrast, the enterprise
here, S & K, was benefitted, not harmed, by Reiman's activities.
Moreover, because the fraudulent insurance claims were submitted to third
persons, there is no discernable connection between those activities and
the actions of S & K's employees.
Plaintiff argues that Reiman's issuance of the insurance binders
"materially affected the direction of the enterprise (S & K) by enabling
and encouraging S & K employees and officers to carry out their
fraudulent schemes." However, this connection is too tenuous to establish
participation in the direction of the enterprise because it focuses solely
on the attitude of S & K's employees and officers, not the actions of
Reiman. Unlike the insurance company in Davis, which intermingled its
agents and employees with those of the enterprise, the Amended Complaint
alleges no actual connection between Reiman and S & K's employees.
Moreover, S & K's employees were not directly forced into action by
Reiman's activities, as was the enterprise in Aetna.
In the end, Reiman was merely providing services to the enterprise when
he issued the insurance binders. This is not enough to meet the
participation requirement under Reves. Peat, Marwick, 996 F.2d at 1539;
Arenson, 880 F. Supp. at 1209; A.I. Credit, 847 F. Supp. at 601-02;
Sassoon, 822 F. Supp. at 1307. Even if by providing such services, Reiman
implicitly "encouraged" S & K and its employees to pursue the scheme,
this is not enough to show that Reiman actively directed or controlled
the enterprise itself. Reiman's actions are too passive to have done so.
But what about Reiman's clear intent to participate in the scheme? This
confuses the requirement under Reves that Reiman participate in
"directing the enterprise's affairs," 507 U.S. at 178, 113 S.Ct. at 1170
(emphasis added), with the idea that Reiman participated in the scheme
itself.*fn10 Participation in the scheme is a necessary, but not
sufficient, element of a § 1962(c) claim. To hold otherwise would
stretch the meaning of Reves too far: anyone involved in a fraudulent
scheme would be held to indirectly encourage members of the enterprise so
as to "direct the enterprise's affairs." Thus, the Court holds that
Plaintiff's Complaint fails to state a cause of action against Defendant
Reiman under § 1962(c).
Failure to State a Conspiracy Claim Under § 1962(d)
Finally, Reiman contends that Plaintiff has failed to adequately allege
a conspiracy claim against him under § 1962(d). The Court has already
held that Plaintiff lacks standing to pursue its claims under §
1962(a) or § 1962(b) and any conspiracy claims that may arise
therefrom. However, Plaintiff still has a possible conspiracy claim
premised upon a violation of § 1962(c).
The Seventh Circuit has held that § 1962(d) liability is not
coterminous with liability under § 1962(c). United States v.
Quintanilla, 2 F.3d 1469, 1485 (7th Cir. 1993). Thus, the Supreme Court's
decision in Reves regarding § 1962(c) claims does not affect this
Court's analysis of Plaintiff's § 1962(d) claim premised upon
Defendants' alleged conspiracy to violate § 1962(c). See MCM, 62 F.3d
at 979 citing Quintanilla, 2 F.3d at 1484-85 ("A defendant may conspire
to violate section 1962(c) even if that defendant could not be
characterized as an operator or manager of a RICO enterprise under
To allege a conspiracy to violate § 1962(c), Plaintiff must plead
that: (1) each
defendant agreed to conduct the affairs of an enterprise; (2) each agreed
to the commission of at least two predicate acts; and (3) each defendant
knew that those predicate acts were part of a pattern of racketeering
activity. Schiffels v. Kemper Financial Servs., Inc., 978 F.2d 344, 352
(7th Cir. 1992). Mere association with the enterprise is not enough. In a
RICO conspiracy, as in all conspiracies, agreement is essential. United
States v. Neapolitan, 791 F.2d 489, 499 (7th Cir.), cert. denied,
479 U.S. 940, 107 S.Ct. 422, 93 L.Ed.2d 372 (1986).
Conclusory allegations of conspiracy are not sufficient to state a
claim under § 1962(d); rather, Plaintiff must allege facts from which
one can infer each defendant's agreement to violate § 1962(c). Id.;
see also Midwest Grinding Co., Inc. v. Spitz, 716 F. Supp. 1087, 1093
(N.D.Ill. 1989), aff'd, 976 F.2d 1016 (7th Cir. 1992) ("A complaint which
merely implies that a defendant is responsible for someone else's
fraudulent acts is insufficient to satisfy section 1962(d)."). A
conspiracy claim must contain supportive factual allegations sufficient
to describe the conspiracy's general composition, its objectives, and the
defendant's general role in the conspiracy. Schiffels, 978 F.2d at 352
citing Rose v. Bartle, 871 F.2d 331, 366 (3d Cir. 1989).
The Court finds that these pleading requirements have been met here.
Paragraphs 49 and 50 of Plaintiff's Amended Complaint allege a scheme by
which Reiman would issue temporary insurance binders that would later be
cancelled after S & K received financing from Plaintiff. While the
Complaint does not mention the words "agree" or "agreement," it does
allege that both Reiman and the other conspirators knew that the binders
would eventually be cancelled because many of the borrowers were
uninsurable. This is enough to infer that all of the conspirators
implicitly agreed to carry out this scheme on behalf of the enterprise.
Moreover, paragraphs 73 through 75 of the Amended Complaint allege that
Reiman himself carried out at least two predicate acts of mail fraud.
Because S & K employed Reiman as its insurance agent for the purpose of
issuing these bogus binders, the Court makes the reasonable inference
that there was an agreement among all Defendants that Reiman's acts of
mail fraud were made in furtherance of the enterprise's scheme to
defraud. And since Reves does not apply to § 1962(d) claims, MCM, 62
F.3d at 979; Quintanilla, 2 F.3d at 1485, the Court finds that Reiman
agreed to conduct the affairs of the enterprise by agreeing to play a
integral role in the alleged scheme to defraud Plaintiff. Thus, the Court
denies Reiman's motion to dismiss the conspiracy claim against him.
IT IS THEREFORE ORDERED that Defendant Randy Reiman's Objections to the
Magistrate's Report and Recommendation [Doc. # 139] are GRANTED in part
and DENIED in part. Accordingly, the Magistrate Judge's Report and
Recommendation is ADOPTED in part and REJECTED in part.
IT IS FURTHER ORDERED that Defendant Randy Reiman's Motion to Dismiss
First Amended Complaint [Doc. # 106] is GRANTED in part and DENIED in
part. The motion to dismiss is granted only as to Plaintiff's punitive
damages claim in Count I and Plaintiff's RICO claims under §§
1962(a), (b) and (c) in Count II. Plaintiff's punitive damages claim in
Count I and the §§ 1962(a) and (b) RICO claims in Count II shall be
DISMISSED with prejudice as to all Defendants. The § 1962(c) claim
shall be DISMISSED with prejudice as to Defendant Reiman only.*fn11 This
matter is referred to Magistrate Judge Kauffman for further proceedings.