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ROSE v. MONY LIFE INS. CO.

February 1, 2000

ANN ROSE, MICHAEL SCOTT, WENDIE ROSE SCOTT AND MICHAEL ROSE, PLAINTIFFS,
V.
MONY LIFE INSURANCE COMPANY, MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, MONY LIFE INSURANCE COMPANY OF AMERICA, RAYMOND C. VESELIK AND SCOTT VESELIK, DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Plaintiffs Ann Rose, Michael Scott, Wendie Rose Scott and Michael Rose have sued defendants Mony Life Insurance Company, Mutual Life Insurance Company of New York, Mony Life Insurance Company of America, (collectively, "MONY"), Raymond C. Veselik ("Raymond") and Scott Veselik ("Scott") alleging violations of the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1962 et seq. ("RICO"), as well as state law claims for fraud, violations of the Illinois Consumer Fraud Act, negligent retention, breach of fiduciary duty, breach of contract, and reformation. MONY and Raymond have moved to dismiss the RICO counts (I and II) for failure to state a claim, and the state law claims for lack of pendant jurisdiction.*fn1 MONY also argues that (a) all counts are barred by the applicable statute of limitations, (b) Counts III and IV (fraud and Illinois Consumer Fraud Act) fail to allege fraud with sufficient particularity, and (c) Counts V and VIII (negligent retention and reformation) fail to state a claim. In addition to the arguments raised by the other defendants, Scott argues that there is no pendant jurisdiction over him because he is not a defendant to the federal RICO counts. For the reasons set forth below, the court grants the defendants' motion to dismiss with respect to Counts I and II, but grants plaintiff leave to file an amended Count II along with a RICO case statement. The motions to dismiss are denied in all other respects.

Facts

According to the allegations of the complaint, defendant Raymond Veselik became a close friend and personal financial advisor to plaintiff Ann Rose after her husband died in 1974. During the following year, Ann became increasingly dependent on Raymond for assistance in all matters involving her assets and estate. This dependence intensified in 1987 when Ann then 65, suffered a serious illness, and continued into the 1990s.

Throughout the relevant time period, Raymond was an insurance agent for MONY and the employee manager of the MONY Agency located in Itasca, Illinois ("Agency"). Scott is Raymond's son and worked in the Agency. Plaintiffs allege that starting in 1976, Raymond devised and engaged in a scheme to induce plaintiffs to purchase and continue to purchase and maintain insurance policies and annuities through the use of oral and written misrepresentations, as well as unauthorized loans and transfers and/or fraudulently secured authorizations for loans and transfers. Among the alleged misrepresentations made by Raymond and or Scott are that: 1) the MONY insurance policies sold to plaintiffs were good and appropriate investments that would "pay for themselves" or constitute fully paid up policies with no further premiums due after several years of premium payments; 2) after a policy was "paid up" or its cash value covered the amount of premium due, a new policy could be purchased without any additional cash because the new policy's premium would be funded solely by income from or loans against the older policies; 3) the policies would continue in force and increase in value despite loans taken against them; and 4) death benefits would not be reduced by loans against the policy.

In 1995 Raymond took Ann to a lawyer and had her execute documents making Raymond executor of her estate. Also in 1995 Ann Rose transferred her entire investment portfolio, in excess of $1,000,000, to Mony Securities Corp. through Raymond's other son, Randall Veselik, a Mony Securities Corp. agent.

From 1976 through 1996, relying on defendants' misrepresentations Ann, her son Michael, daughter Wendie Scott and son-in-law Michael Scott purchased in excess of 23 MONY life insurance policies and annuities.

The complaint further alleges a second scheme perpetrated on William K. Maloney and Alyce L. Maloney during 1987, and 1995 though 1996. Plaintiffs allege that MONY became aware of the Maloneys' claims of fraud as early as May 1996, yet continued to process loans and withdrawal requests received from Raymond with respect to plaintiffs' policies. The complaint sets forth 18 separate incidents of misrepresentations made by Raymond and Scott to various plaintiffs relating to different policies or annuities purchased.

Discussion

The RICO Counts

Count I: § 1962(a)

Counts I and II allege RICO violations against Raymond and MONY. Count I alleges a violation of § 1962(a). MONY and Raymond have both moved to dismiss Count I for failure to state a claim, arguing that the complaint: 1) fails to allege an injury resulting from the investment of racketeering income; 2) fails to allege a pattern of racketeering activity and; 3) fails to identify a RICO enterprise.

Section 1962(a) prohibits "any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income and the acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in or the activities of which affect interstate commerce." Section 1964(c) in turns provides a cause of action to anyone injured in his business or property "by reason of" a violation of § 1962. Defendants argue that plaintiffs have not alleged that they have been injured "by reason of" a § 1962(a) violation. Put in other words, defendants argue that plaintiffs have not and cannot allege that they have been injured by defendants' "use of any income" derived from the pattern of racketeering activity, as opposed from being injured by the predicate acts themselves.

As the parties have noted, the Seventh Circuit has not yet addressed the issue of whether to state a claim under § 1962(a) the plaintiff must allege injury from the use or investment of income derived from racketeering activity. The majority of circuit courts to address the issue have held that such allegations are necessary, and that allegations of injury from the racketeering activity alone are insufficient. See Fujisawa Pharmaceutical Co. Limited v. Kapoor, 814 F. Supp. 720, 734 (N.D.Ill. 1993) (compiling cases). These decisions are based on the plain wording of the statute. Id. This court agrees with the reasoning of those cases, and notes particularly, Judge Shadur's explanation in P.M.F. Services, Inc. v. Grady, 681 F. Supp. 549, 556 (N.D.Ill. 1988):

By contract § 1964's private civil remedy mandates the identification of such victims, in order that they have standing to sue. Most importantly, each such victim must have been "injured in his business or his property by reason of a violation of § 1962. . . ." Hence the nature of the claim necessarily depends on the nature of the "violation" — and in each instance the specific subsection of § 1962 makes the violation not the conduct or racketeering activity alone, but rather the use of that racketeering activity in the particular way the subsection declares unlawful. Once again that means a specific subsection — in this instance § 1962(a) — may not provide a universal remedy to serve the purposes, or to fit the mandate, of § 1964.

This court respectfully disagrees with Judge Moran's conclusion in Pinski. Although, as Judge Moran states, the "churning scheme, if proved, involved an investment of the racketeering income in an enterprise that damaged the plaintiff's business or property," Id. at *9, it must be the investment, not the enterprise, that injures the plaintiff. By holding as he did, Judge Moran essentially held that damage from the predicate act is sufficient, rendering § 1962(a) redundant to § 1962(c), something he specifically rejected three paragraphs earlier. Id. Moreover, Sutliff Inc. v. Donovan Companies, Inc., 727 F.2d 648 (7th Cir. 1984) (overruled on other grounds), the case on which Judge Moran relied, is inapposite. In Sutliff, the plaintiff Sutliff Inc., a bankrupt corporation, and two of its creditors sued the defendants under all three RICO sections, alleging that those defendants, knowing that Sutliff was going under and that its sole owner and operator, Ms. Sutliff, was psychologically incapacitated, made cash advances to her to induce her to sell them oil below cost. The defendants then resold that oil at a profit but below market prices. The defendants knew that they were driving Sutliff to inevitable ruin, but the small cash advances were intended to and did persuade Sutliff's creditors that Sutliff was solvent, convincing them to continue to extend Sutliff credit. Therefore, the allegation that the defendants reinvested into Sutliff the income earned from the racketeering activity was sufficient, because it was the reinvestment itself that harmed the plaintiff creditors by inducing them to extend credit.

In the instant case, there is no allegation that absent the alleged fraudulent scheme the Agency would have gone under, or that the reinvestment of the fraudulently obtained money into the Agency or into MONY was intended to deceive plaintiffs into continued dealing with Raymond. Indeed, the complaint specifically alleges that plaintiffs continued to deal with Raymond because of a special relationship that he had developed with plaintiff Ann Rose. Therefore, Sutliff lends no support to plaintiffs' position. Count I is therefore dismissed for failure to allege an injury to plaintiffs resulting from a violation of § 1962(a).*fn2

Count II: § 1962(c)

In Count II, plaintiffs allege that Raymond and MONY have violated § 1962(c), which provides:

It shall be 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 ...

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