United States District Court, N.D. Illinois
March 29, 2004.
LYNNE A. CARNEGIE, on behalf of herself and all others similarly situated, Plaintiff,
HOUSEHOLD INTERNATIONAL, INC., HOUSEHOLD BANK, f.s.b., successor in interest to BENEFICIAL NATIONAL BANK, HOUSEHOLD TAX MASTERS INC., formerly known as BENEFICIAL TAX MASTERS INC., BENEFICIAL FRANCHISE COMPANY, INC., H&R BLOCK, INC., H&RBLOCK SERVICES, INC., H&R BLOCK EASTERN TAX SERVICES, INC., BLOCK FINANCIAL CORP., and HRB ROYALTY, INC., Defendants
The opinion of the court was delivered by: ELAINE E. BUCKLO, District Judge
MEMORANDUM OPINION AND ORDER
In 1995, plaintiff Lynne A. Carnegie, a citizen of New York,
responded to an advertisement and patronized an H&R Block store in
New York. She purchased a refund anticipation loan ("RAL") and paid
charges of $110 on a nine-day loan of $500. Ms. Carnegie alleges that she
was duped into buying the RAL through a complex and illegal scheme
involving various arms of H&R Block (collectively, "Block") and arms
of its co-conspirator bank (collectively "Beneficial"). In brief, the
scheme alleged is as follows. Block runs a tax preparation and advising
service with numerous branches throughout the country. Block also
performs electronic filing of
tax returns, which greatly speeds up the arrival of patrons' refund
checks. Block made a bargain with Beneficial whereby Block would
advertise and sell Beneficial's RALs to its customers. Block provided its
customers with the loan documentation and even printed the check, but the
funds came from Beneficial, and the obligation to repay via refund check
was likewise to Beneficial. Block received a payment from Beneficial for
each RAL customer it recruited.
This case, then titled Zawikowski v. Beneficial, Reynolds v.
Beneficial, and Turner v. Beneficial, reached settlement.
That settlement was approved by Judge Zagel, but remanded by the Seventh
Circuit for further consideration. Reynolds v. Beneficial Nat'l
Bank, 288 F.3d 277 (7th Cir. 2002). I subsequently rejected the
settlement and required that new counsel represent the class.
Reynolds v. Beneficial Nat'l Bank, 260 F. Supp.2d 680 (N.D.
Ill. 2003). New counsel (objectors to the earlier settlement) filed a
second amended complaint in which they substituted Ms. Carnegie as the
only named plaintiff. The defendants now move to dismiss that complaint.
The parties have also addressed class certification issues, with the
defendants arguing that the class should be decertified.
On a motion to dismiss, I accept as true all well-pleaded facts in the
complaint, and grant the motion only if the plaintiff can prove no set of
facts to support his claim. Strasburger v. Bd.
of Educ., 143 F.3d 351, 359 (7th Cir. 1998).*fn1 I deny
the motion to dismiss Count II as to the racketeering and conspiracy
provisions of RICO, but grant it as to the investment injury and
enterprise control provisions. The motion to dismiss Counts III, IV, V,
and VIII (consumer fraud, breach of fiduciary duty, subornation of breach
of fiduciary duty, and unjust enrichment) is denied as moot; I withdraw
certification of the class as to those claims. The motion to dismiss
Counts VI and VII (breach of contract) is granted as to Block. I deny the
motion to dismiss Count VI as to Beneficial. The motion to dismiss Count
VII as to Beneficial is denied as moot; the plaintiff has voluntarily
withdrawn that count.
The defendants move to dismiss Count II, which alleges violations of
four different provisions of the Racketeer Influenced and Corrupt
Organizations act ("RICO"), 18 U.S.C. § 1961, 1962(a)-(d), et
seq. (addressing investment injury, enterprise control,
racketeering, and conspiracy, respectively). The defendants argue that
this count fails to state a claim for numerous reasons, including lack of
Fed.R.Civ.P. 9(b) particularity, failure to allege a RICO enterprise,
failure to plead an investment injury, failure to plead an injury
stemming from the defendants' acquisition or control of an enterprise,
failure to plead that each
defendant conducted the affairs of the enterprise, failure to
allege conspiracy, and failure to comply with the statute of limitations.
Ms. Carnegie responds that each of these arguments either has no merit or
is barred from consideration by judicial estoppel because Judge Zagel
denied a motion to dismiss RICO claims earlier in the case. I find that
the complaint adequately states a claim against all defendants under the
racketeering and conspiracy provisions of RICO, but not under the
investment injury or enterprise control provisions.*fn2
The law of the case doctrine bars reconsideration of Judge Zagel's
ruling in Turner v. Beneficial, No. 98 C 2550 (Mar. 30, 1999),
which held that the plaintiff class adequately alleged a RICO enterprise,
stated a claim under § 1962(c), the racketeering provision of RICO,
and satisfied the heightened pleading requirements of Fed.R.Civ.P.
9(b). See Parts & Elec. Motors, Inc. v. Sterling Elec.,
Inc., 866 F.2d 228 (7th Cir. 1988) (prior decisions in a case should
not be overruled unless they strike the reviewing court as wrong "with
the force of a five-week-old, unrefrigerated dead fish"). Although the
named plaintiff in this case has changed since the time of that ruling,
the plaintiff class and the central allegations of the claim have not.
defendants are bound by that ruling. However, Block had been
dismissed from this case at the time of Judge Zagel's ruling, and the
RICO claim against Block must be evaluated on its merits.
Block argues that Count II fails to comply with the heightened pleading
requirement of Fed.R.Civ.P. 9(b). The predicate acts that form the
basis of Ms. Carnegie's RICO claim are acts of consumer fraud, and thus
must be pleaded with particularity. This requirement "must be relaxed
where the plaintiff lacks access to all facts necessary to detail his
claim," Corley v. Rosewood Care Ctr., 142 F.3d 1041, 1051 (7th
Cir. 1998). This case is unique in that not only has it been ongoing for
over five years, but one of Block's counsel participated in drafting a
previous complaint alleging violations of RICO. Under the circumstances
of this case, Rule 9(b) is satisfied.
Turning to the other issues raised in the motion to dismiss, Block
argues that Ms. Carnegie failed to allege a RICO enterprise, an element
of her claim under § 1962(c). That provision addresses injuries to
the plaintiff resulting directly from the defendants' predicate acts.
See Peterson v. H & R Block Tax Servs., Inc., 22 F. Supp.2d 795,
802 (N.D. Ill. 1998) (in order to state a § 1962 claim, the
plaintiff must allege that the defendants "(1) conducted (2) an
enterprise through (3) a pattern (4) of racketeering activity"). A RICO
enterprise is "a group of persons associated together for a common
purpose of engaging in a course of conduct."
United States v. Turkette, 452 U.S. 576, 583 (1981). An
enterprise is shown by "evidence of an ongoing organization, formal or
informal, and by evidence that the various associates function as a
continuing unit." Id. An enterprise must be more than simply a group of
people who get together to commit crimes, or a group of associated
businesses operated in concert; it must have structure and continuity, as
well as "differentiation of the roles within it." Richmond v.
Nationwide Cassel L.P., 52 F.3d 640, 645. However, an enterprise
need not have the complexity of a corporation. "There must be some
structure, to distinguish an enterprise from a mere conspiracy, but there
need not be much." Burdett v. Miller, 957 F.2d 1375, 1379 (7th
This is exactly what Ms. Carnegie alleges. The complaint states that
the Block defendants and the Beneficial defendants operated a scheme to
defraud customers, distinct from the other ordinary business dealings
each conducted, whereby Block would attract and mislead consumers into
purchasing extremely expensive loans from Beneficial in exchange for a
cut of the profits. The defendants' argument that mere contractual
relations between entities cannot create a RICO enterprise is accurate,
but misplaced. Ms. Carnegie does not rely solely on the contractual
relationship between the parties to support her RICO claim. Rather, the
contractual relationship is simply one fact among many which together
constitute an adequate allegation of a RICO enterprise.
The Block defendants argue that Ms. Carnegie failed to adequately
allege that each defendant conducted the affairs of the enterprise, an
additional element crucial to a 1962(c) claim. Goren, 156 F.3d
at 727. They base this argument on the fact that the complaint does not
distinguish among the Block defendants, who are alleged to have operated
the enterprise. This argument is unpersuasive. At the pleading, stage,
prior to discovery, a plaintiff cannot be expected to determine which of
the various Block entities was in control of which aspects of the
enterprise. It is sufficient to plead the acts complained of and
attribute them to "H & R Block," even if the plaintiff does not know
whether "H & R Block, Incorporated" or "H & R Block Services,
Incorporated" was the entity technically in charge of the disputed
transaction. Block cannot evade liability by hiding behind its
multi-faced corporate identity.
Next, defendants argue that Ms. Carnegie has failed to plead an
investment injury, an element of her claim under § 1962(a). This
section covers injuries which are caused by the use or investment of
racketeering income. Although the Seventh Circuit has yet to make a
definitive ruling on the question, "the majority of circuits hold that
the use or investment of the racketeering income must proximately cause
the plaintiff's injury; injury caused by the predicate racketeering acts
is inadequate." Vicom, Inc. v. Harbridge Merch. Servs., Inc.,
20 F.3d 771, 779, n.6 (7th Cir.
1994). Since Vicom, "each court in this district addressing the
issue has adopted the majority use or investment rule." Shapo v.
O'Shaughnessy, 246 F. Supp.2d 935, 965 (N.D. Ill. 2002) (collecting
cases). I agree with my colleagues that this interpretation is most
faithful to the plain wording of the statute. See, e.g., Rose v. Mony
Life Ins. Co., 82 F. Supp.2d 920, 923 (N.D. Ill. 2000). Thus, in
order to state a claim under § 1962(a), Ms. Carnegie must allege an
investment injury which can be distinguished from the injuries resulting
from the predicate acts of fraud. Id. The complaint does not meet this
standard. Ms. Carnegie alleges that the defendants used racketeering
income "to acquire an interest in, establish, or operate the RAL
enterprise . . . which has caused injury to plaintiff." 2d Am. Compl. at
217. In other words, it is the enterprise, not the investment, which
caused the alleged injury. The motion to dismiss is granted as to the
alleged violations of § 1962(a).
The defendants argue next that Ms. Carnegie has failed adequately to
plead injury stemming from enterprise control. Like § 1962(a), a
claim relying on § 1962(b) must allege that the plaintiff's injury
resulted from the defendants' acquisition or control of the RICO
enterprise, rather than from the predicate acts. Midwest Grinding
Co., Inc. v. Spitz, 716 F. Supp. 1087, 1091 (N.D. Ill. 1989)
(comparing § 1962(a) and § 1962(b) and concluding that the same
standard applies to both); Roger Whitmore's Auto.
Servs., Inc. v. Lake County, No 99-C2504, 2002 U.S. Dist.
LEXIS 8289, at *30 (N.D. Ill. May 9, 2002) (citing Midwest
Grinding). Here, Ms. Carnegie does not allege separate injury
proximately caused by the defendants' ownership of the enterprise; the
complaint states only that the defendants owned the enterprise and the
enterprise harmed the plaintiffs.2d Am. Compl. at 218. The motion to
dismiss is granted as to the alleged violations of § 1962(b).
Finally, the defendants contend that Ms. Carnegie fails to plead a
conspiracy under § 1962(d). That section covers conspiracy to violate
provisions (a), (b), or (c) of § 1962. The defendants argue that the
language in Count II is merely a "naked and insufficient legal
conclusion" and does not satisfy the standard. While it is true that
Count II itself does not contain detailed allegations, it incorporates
the preceding paragraphs in the body of the complaint, which contain
numerous explicit statements spelling out the who, what, and when of the
alleged agreement between the Block defendants and the Beneficial
defendants.2d Am. Compl. at 47-64. These allegations, taken in sum, are
more than enough to state a claim for conspiracy under § 1962(d).
The defendants argue for decertification of the plaintiff class as to
the RICO count on the basis of In the Matter of
Bridgestone/Firestone, Inc., 333 F.3d 763 (7th Cir. 2003). Because a
court in 1996 had refused to certify a RICO class alleging
similar claims against some of the defendants in this case,
defendants say the class claims here are barred by collateral estoppel
under Bridges tone/Fires tone. Buford v. H&R Block,
168 F.R.D. 340, 364 (S.D. Ga. 1996), aff'd., 117 F.3d 1433 (11th
Cir. 1997). Defendants did not raise this argument in either the Seventh
Circuit or this court at the time they were arguing for approval of the
prior settlement.*fn3 Obviously, if the alternative to settlement was no
class at all, the settlement would indeed be fair. Defendants have waived
this defense by failing to raise it when the Seventh Circuit and this
court were considering whether the settlement should be approved. In
addition, defendants obtained definite benefits from the class
certification in this case. During the period after approval of the class
and settlement by the district court in 1999 and the time I rejected the
settlement in 2003, defendants were able to enjoin numerous other actions
on the basis of the class settlement. While those injunctions were
ultimately vacated, defendants do not even argue that they obtained no
benefit from the injunctions.
The defendants move to dismiss Counts VI and VII, which allege two
breach-of-contract theories against both sets of defendants.
The parties agree that the Delaware choice-of-law provision in the RAL
documents governs claims for breach of those documents.
Judge Zagel has already twice denied motions to dismiss breach of
contract claims against Beneficial substantially similar to Count VI.
Zawikowski v. Beneficial Nat'l Bank, No. 98-C2178, 1999 U.S.
Dist. LEXIS 514, at *11 (N.D. Ill. Jan. 11, 1999); Turner, No, 98-C2550
(Mar. 30, 1999). These rulings are the law of the case, and I will not
revisit them now. Count VI against Beneficial withstands the motion to
dismiss. Carnegie concedes that the actions complained of in Count VII
were not barred by the agreement, and thus voluntarily withdraws Count
VII as to Beneficial. Pl. Opp. to Ben. Def.'s Mot. to Dismiss, at 14.
Block argues that Ms. Carnegie cannot sustain a claim against it for
breach of contract, as it was not a party to any RAL contract. In her
opposition to the Block defendants' motion to dismiss, Carnegie relies on
the following language to support her position that Block entered into a
unilateral contract with its RAL customers:
I hereby authorize and request H&R Block and
its affiliates to disclose to Beneficial National
Bank and its agents ("BNB") my federal income tax
return for tax year 1994, any and all other
information contained in such tax return, all
information supplied to H&R Block, including
IRS direct deposit information, in connection with
the preparation of such tax return, and all other
information contained in this form and any
information contained in any of my prior RAL
applications which was disclosed to H&R Block.
I authorize and consent to the disclosure of the
foregoing information for the purpose of enabling
BNB to determine whether or not to make a Refund
Anticipation Loan ("RAL") to me in response to any
for such loan which is a part of this form . . .
H&R Block may not use or disclose such tax
return information for any purpose . . . other
than as stated herein."
Pl.'s Corr. Opp. to Block Def. Mot. to Dismiss, at 14-15. The
quoted language describes no obligation on Block's part whatsoever.
According to this document, Block is authorized to reveal information
under certain circumstances, but Block makes no promise, or even offer,
to do so. I cannot see how Block can be in breach of an agreement wherein
it did not promise to do anything. Ms. Carnegie cites to three Delaware
cases which allegedly support the notion that this language could
constitute a binding contract enforceable against Block, but none comes
close to holding that authorizations like the quoted language can
constitute an enforceable contract.*fn4
I grant the motion to dismiss Counts VI and VII as to Block. I deny the
motion to dismiss Count VI as to Beneficial. The motion to dismiss Count
VII as to Beneficial is denied as moot, as that count has been
The defendants move to dismiss Counts III, IV, V, and VIII on a number
of grounds. I find that the multi-state legal analysis which would be
required to resolve each of these claims presents an intractable class
The Seventh Circuit's prior acceptance of the certifiability of the
class, discussed above, is binding on every point except the adequacy of
the new named plaintiff (discussed in Section VI, below), adequacy of
counsel and manageability, which is analyzed differently for settlement
classes and litigation classes. "Confronted with a request for
settlement-only class certification, a district court need not inquire
whether the case, if tried, would present intractable management
problems." Amchem Prods. Inc. v. Windsor, 521 U.S. 591, 620
(1997). Where litigation classes are concerned, however, courts must give
the manageability issue a "close look." Id. at 615-16. While all claims
here present a management challenge simply due to the size of the class,
the difficulties presented by the federal claims are surmountable.
However, the four state-law claims discussed here present such unwieldy
issues that a nationwide class action cannot be the most efficient method
of resolving them.
In her briefs, Ms. Carnegie makes conflicting arguments as to what law
will apply to the four claims, arguing at various points for the law of
Illinois, Delaware, and federal common law. None of arguments are
persuasive. When deciding pendent claims based in state law, federal
district courts apply the choice-of-law rules of the state where they
sit. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941).
Illinois' choice-of-law doctrine applies the law of the state which has
the most significant contacts with the dispute. Ingersoll v.
Klein, 262 N.E.2d 593 (Ill. 1970). As the class members apparently
reside in all fifty states, negotiated and entered into RAL agreements in
all fifty states, and were allegedly injured in all fifty states, it
cannot be that any one state had the most significant contacts with all
those millions of disputes. This dispute's contacts with states of the
defendants' incorporation or the forum state will not outweigh the much
stronger contacts each RAL transaction had with the state where it was
negotiated and entered into and where the class member was allegedly
injured. See In the Matter of Rhone-Poulenc Rorer Inc.,
51 F.3d 1293, 1302 (7th Cir. 1995) (ordering the decertification of a 50-state
class alleging a state-law negligence claim in part because the voices of
the quasi-sovereign states "sing negligence with a different pitch,"
making it impossible for one jury to take into account the nuances of 50
applicable standards); In the Matter of Bridgestone/Firestone,
Inc., 288 F.3d 1012 (7th Cir. 2002).
Defending the manageability of the class, Ms. Carnegie argues that the
defendants have not demonstrated substantial or confusing differences
among the states in the law that would be applied to the class' claims.
Ms. Carnegie misunderstands her task; it is she who bears the
burden of demonstrating manageability and the absence of variability in
state law. See, e.g., In re Synthroid Mktg. Litig.,
188 F.R.D. 287, 294 (N.D. Ill. 1999) ("The burden is on plaintiffs to
demonstrate that a class is appropriate for certification . . . The
plaintiffs have not . . . demonstrate[d] how a national class action on
their common law claims would be manageable."); Tylka v. Gerber
Prods. Co., 178 F.R.D. 493, 498 (N.D. Ill. 1998) (denying
certification of a nationwide class because "Plaintiffs fail to meet
their burden and demonstrate that the nuances of 50 consumer fraud
statutes and 50 common laws are manageable"). Ms. Carnegie has failed to
show the similarities of state law which would justify certification of
the plaintiff class as to those claims.
As a last resort, Ms. Carnegie argues that state-by-state variation may
be resolved by sub-classing, but she has made no motion for the creation
of sub-classes, and at any rate whether the inclusion of fifty
sub-classes would improve manageability is an open question. If the laws
of the fifty states all follow one of a small number of identical
standards, Ms. Carnegie has not made any attempt to prove that this is
the case. Judging from the cases
cited by the defendants, who do a much more thorough job of
analyzing the question than the plaintiff, the state law which governs
each of Ms. Carnegie's claims varies widely and would be extremely
difficult to categorize.
A nationwide litigation class cannot be certified as to the state law
claims in Counts III, IV, V, and VIII. Certification is withdrawn as to
The briefs in this case raise certain issues concerning the parties
which do not relate directly to any particular count in the complaint.
Both defendants argue that Ms. Carnegie has named defendants against whom
she has no claim. Block alleges that H & R Block Eastern Tax Services
is the only appropriate Block defendant, as it was the only Block entity
which had any interaction with Ms. Carnegie. Beneficial makes a similar
argument, stating that only Beneficial National Bank may properly be
sued, and that the other Beneficial defendants are innocent victims of
Ms. Carnegie's indiscriminate naming of defendants. At the pleading
stage, a consumer plaintiff cannot be expected to express a complete
understanding of the relationships among the holdings in a complex
corporate structure. At this time, it is beyond the ability of both the
plaintiff and this court to determine which Block entities and which
Beneficial entities are ultimately responsible for the
actions at issue in this suit. Therefore, I decline to dismiss any
defendants from the suit.
The defendants also point out that RAL agreements after 1996 included
an arbitration clause. In his order of January 11, 1999, Judge Zagel
ruled that these arbitrations were enforceable. Carnegie argues that this
decision does not preclude reconsideration of the question, because at
the time of that decision, the class was represented by counsel later
held by the court to be deficient, and it would be improper to enforce a
ruling against the class. While I agree with this argument, I also agree
with Judge Zagel's reasoning in that order. The Seventh Circuit strongly
favors enforcement of arbitration provisions, and has declined to
override them even in far more adhesive circumstances than those
surrounding the RAL transactions. See, e.g., Hill v. Gateway 2000,
Inc., 105 F.3d 1147 (7th Cir. 1997); Champ v. Siegel Trading
Co., Inc., 55 F.3d 269 (7th Cir. 1995). Contrary to Carnegie's
argument, the defendants' involvement in settlement proceedings over the
last several years' does not constitute an election of legal remedies and
corresponding waiver of the right to arbitrate. The class in this case
excludes those RAL customers whose contracts included agreements to
arbitrate disputes arising from the transaction.
Finally, the defendants challenge Carnegie's ability to represent the
class, alleging that the facts of her claim are
atypical. In particular, they point to her lack of reliance on
deceptive advertising and her failure to read the RAL application before
signing it. These attributes of the plaintiff's experience are examples
of the type of individual variation which necessarily distinguishes class
members from one another in every class action. No two individuals'
claims will ever be identical; the question is whether the named
plaintiff's claim "arises from the same event, practice, or course of
conduct that gives rise to the claim of other class members and is based
upon the same legal theory as other class claims." Ringswald v.
County of DuPage, 196 F.R.D. 509, 512 (N.D. Ill. 2000). Carnegie's
claim meets this standard. The defendants' arguments that Carnegie's
history provide special problems for her breach of fiduciary duty and
consumer fraud claims are mooted by the decertification of those claims.
Carnegie has satisfied the typicality requirement and may serve as class