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EMERY v. AMERICAN GEN. FIN.

August 28, 1996

VERNA EMERY, on behalf of herself and all others similarly situated, Plaintiff,
v.
AMERICAN GENERAL FINANCE, INC. and AMERICAN GENERAL FINANCE CORP. Defendants.



The opinion of the court was delivered by: GETTLEMAN

 Plaintiff Verna Emery has brought a two count putative class action amended complaint against defendants American General Finance Corp. ("AGFC") and American General Finance, Inc. ("AGFI"). Count I alleges a violation of the Racketeer Influence and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961, et seq., and is brought against only AGFC. Count II, brought against both defendants, alleges violations of the consumer fraud statutes of all fifty states and the District of Columbia. Defendant AGFC has moved to dismiss the RICO count pursuant to Fed. R. Civ. P. 12(b)(6), arguing that it fails to allege: (1) a RICO "enterprise" distinct from the RICO "person"; (2) that AGFC personally conducted or participated in the affairs of the alleged enterprises; and (3) a pattern of racketeering activity. Both defendants have moved to dismiss the consumer fraud claims, arguing that they cannot state a claim because AGFI's disclosures complied fully with the requirements of the Truth-In-Lending Act. For the reasons set forth below, the court agrees that Count I fails to allege both an enterprise distinct from the RICO person and a pattern of racketeering activity and, therefore, is dismissed. Because Count I is the only basis for this court's original jurisdiction, Count II is also dismissed.

 BACKGROUND

 Plaintiff originally brought this action as a one count RICO complaint against AGFI. This court dismissed that suit, concluding that absent a duty to disclose, AGFI could not be found liable for mail fraud. Emery v. AGFI, 873 F. Supp. 1116 (N.D. Ill. 1995). The Seventh Circuit reversed, holding that the complaint alleged adequately an intentional half-truth. Emery v. AGFI, 71 F.3d 1343, 1348 (7th Cir. 1995). In reaching its decision, however, the Seventh Circuit noted that the complaint failed to plead a pattern of racketeering activity because it pled only one instance of mail fraud particularly, and then alleged that defendant did the same thing to others. The court specifically stated that "such details would not be necessary to identify additional members of the plaintiff's class, but are necessary to identify a violation of RICO, which requires (in this case) more than one fraud, and only one is alleged to have been perpetrated against Emery herself." Id. at 1348.

 Heeding the Seventh Circuit's warning, on remand plaintiff filed an amended complaint, totally restructuring her lawsuit. The amended complaint seeks to impose RICO liability not on AGFI, the original defendant, but against its parent, AGFC. Plaintiff has also added additional allegations as to two other AGFI customers, seeking to cure the lack of proper, specific allegations of pattern of racketeering activity. As set forth below, however, plaintiff's restructuring and repleading works to her detriment, not benefit, and she has failed to allege a RICO enterprise distinct from the defendant AGFC or a pattern of racketeering activity.

 FACTS1

 According to plaintiff's brief, the complaint alleges that defendants engaged in "flipping" or inducing the refinancing of loans through deception and concealment: Basically a finance company solicits its customers to make additional loans. Instead of making another loan, the additional funds are extended by refinancing an existing loan," resulting in greater expense to the customer. Specifically, the complaint alleges that plaintiff signed a note with AGFI on July 14, 1992. Shortly before January 29, 1993, AGFI solicited plaintiff by mail to borrow additional funds. Plaintiff alleges that the flyer sent to her is deceptive and misleading. *fn2" Plaintiff responded to the solicitation, borrowing additional funds. Rather than issuing her a new loan, AGFI refinanced her original loan. AGFI did not tell plaintiff that a refinancing would be more expensive. Plaintiff alleges that it was AGFI's policy and practice to repeatedly solicit existing loan customers by mail to borrow additional funds, using communications such as the flyer sent to her, which lead customers to believe that they were being offered a new and separate loan. AGFI then provides the funds through a refinancing, resulting in greater expense, and conceals and omits to reveal that the refinancing is more expensive. Plaintiff alleges that AGFI markets its loans to working class borrowers who generally do not understand the computations necessary to determine the comparative cost of a new loan versus refinancing.

 With respect to Count I, the complaint alleges three RICO enterprises: (1) AGC; (2) the corporate group headed by AGC (AGC, AGFC, AGFI, and other wholly owned subsidiaries); and (3) the "AGFC group" (AGFC, AGFI, and other unnamed affiliated companies directly or indirectly owned by AGFC). Defendant AGFC is alleged generally to have conducted or participated in the affairs of each of the alleged enterprises through a pattern of mail fraud. Specifically, plaintiff alleges that AGFC devised and implemented a scheme or artifice to: (a) repeatedly solicit existing, unsophisticated loan customers to request additional funds from AGFI and other AGFC subsidiaries using the U.S. mails; (b) deliberately mislead customers into believing that they were going to receive a new, distinct loan; (c) provide existing loan customers with additional funds through refinancing of the original loan, rather than making a new loan, costing the customers additional funds; and (d) concealing or omitting to reveal that the cost of refinancing was greater than obtaining a new loan.

 In Count II, plaintiff realleges all of the factual allegations contained in Count I, and further alleges that such facts constitute a violation of each state and the District of Columbia's consumer fraud statutes.

 DISCUSSION

 AGFC has moved to dismiss Count I, arguing that plaintiff has failed to allege that the RICO "person" is sufficiently distinct from the RICO "enterprise." Section 1962(c), pursuant to which plaintiff brings Count I, provides that "It shall be unlawful for any person employed by or associated with an enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of an unlawful debt." 18 U.S.C. § 1962(c). Thus, to state a claim under § 1962(c) a complaint must allege sufficiently: (1) the existence of an enterprise that affects interstate commerce; (2) that the defendant was employed by or associated with the enterprise; (3) that the defendant participated in the conduct of the enterprise's affairs; and (4) that the defendant participated through a pattern of racketeering activity. Dennis v. Peoples Gas Light & Company, 1990 U.S. Dist. LEXIS 5751, 1990 WL 70372 (N.D. Ill. 1990).

 As noted above, plaintiff has alleged three separate enterprises. AGFC asserts that none is sufficiently distinct from AGFC, the alleged RICO person, thereby violating the distinctiveness requirement of § 1962(c). RICO defines "enterprise" to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). It is now beyond dispute that § 1962(c) requires separate entities as the RICO person and the enterprise which has its affairs conducted through a pattern of racketeering activity. Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384, 400 (7th Cir. 1984), aff'd on other grounds, 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985). It is also true that a subsidiary acts on behalf of, and thus conducts the affairs of, its parent corporation. Id. at 402-403. Therefore, plaintiff argues, she has properly alleged AGC as the RICO enterprise and AGFC, which is 100% owned by AGC, as the RICO person.


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