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Phoenix Bond & Indemnity, Co. v. Bridge

December 21, 2005

PHOENIX BOND & INDEMNITY, CO., OAK PARK INVESTMENTS, INC., AND BCS SERVICES, INC., PLAINTIFFS,
v.
JOHN BRIDGE, BARRETT ROCHMAN, SABRE GROUP LLC, ROBERT JENSEN, JOSEPH VARAN, CRONUS PROTJECTS, LLC, JEFFREY BRIDGE, REGAL ONE, LLC CCJ INVESTMENTS, LLC, DRN II, INC., FRANCIS ALEXANDER, GEORGETOWN INVESTORS, LLC, JASON BAUMBACH, OPTIMUM FINANCIAL, INC., L.C.C. VENTURE, LLC, JESHAY, LLC, JESSE ROCHMAN, CHRISTOPHER ROCHMAN, CORINNE ROCHMAN, BRB INVESTMENTS, LLC, DOUGLAS NASH, MUD CATS REAL ESTATE, LLC, CARPUS INVESTMENTS, LLC, GREGORY ELLIS, GJ VENTURE, LLC DEFENDANTS.



The opinion of the court was delivered by: James F. Holderman, District Judge

MEMORANDUM OPINION AND ORDER REGARDING

DEFENDANTS' MOTIONS TO DISMISS

On July 15, 2005, plaintiffs Phoenix Bond & Indemnity Company ("Phoenix"), Oak Park Investments, Inc. ("Oak Park"), and BCS Services, Inc. ("BCS") filed a complaint against several defendants*fn1 that compete against the plaintiffs and other buyers at the annual Cook County tax lien sale. (Dkt. No. 1.) In the complaint, the plaintiffs raise claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962, 1964, and a state law claim of tortious interference with prospective business advantage. The defendants responded with motions to dismiss under Federal Rule of Civil Procedure 12(b). (Dkt. Nos. 61, 66, 68, 71, 74, 76.) For the reasons stated below, this court grants the defendants' motions to dismiss.

BACKGROUND

Taking all well-pleaded factual allegations in the complaint as true and drawing inferences therefrom in favor of the plaintiffs, Hernandez v. City of Goshen, 324 F.3d 535, 537 (7th Cir. 2003), this court summarizes the basis for plaintiffs' claims as follows. Each year the Cook County Treasurer's Office holds a tax sale on properties on which the owner, after having been given due notice, has failed to pay real estate taxes thereon. At the tax sale, the County offers to the public the opportunity to purchase the tax lien on these properties through an auction. In exchange for the tax lien on the property, the buyer pays the County the delinquent taxes owed. The purchase of the tax lien does not affect the property owner's legal or equitable title to the property; rather, the owner has the right to redeem the property by paying the delinquent taxes and any penalties assessed within a statutorily established redemption period. If the owner does not pay the delinquent taxes and penalties within the redemption period, the tax buyer or the buyer's assignee may obtain a tax deed for the property and thereby buy the property for essentially the value of the delinquent taxes and any subsequent taxes. If the owner redeems the property within the statutory period, the buyer of the tax lien or the buyer's assignee has the right to receive the money paid to redeem the property including any penalties assessed. Once the tax buyer purchases the lien, the buyer may also pay any real estate taxes that become due after the purchase, and those subsequent taxes are subject to a statutory penalty of 12% should the owner wish to redeem the tax lien.

The buyers of the tax liens at the auctions determine the penalty rate assessed on the properties' tax debt by bidding on the penalty percentage rate that will be assigned to the property. Under County rules, the rate ranges between 0% and a maximum penalty of 18%. The winning bids is the lowest penalty rate. For properties where several bidders bid the lowest penalty rate of 0%, the Treasurer allocates those properties on a rotational basis to each of those bidders. If multiple simultaneous bids of the same percentage penalty are made, with no bid being the least, no bid will be accepted. These rules benefit the delinquent property owners by rewarding the bidder who is willing to allow the owner to redeem the property for the smallest penalty is allowed to buy the property. Since the 2000 auction, increasing competition at the auctions has resulted in a typical penalty rate of 0%.

Where the winning bid is 0% for the penalty percentage, there are three possible outcomes for the buyer. If the owner redeems the tax lien promptly, the buyer receives only the repayment of the delinquent taxes. If the subsequent taxes are paid by the buyer before the owner redeems the tax lien, the buyer will receive the delinquent taxes plus the statutory 12% penalty. Should the owner not redeem the property, the buyer will have the opportunity to the obtain a tax deed and full ownership of the property after paying only the taxes on it. The value of the property at the auction depends on the bidders' assessment of these possible outcomes.

In order to complete the sale of the tax lien or to later petition for a deed to the property, a buyer must provide notice to the owner of the property in accordance with Illinois law. Within four months and 15 days of the purchase of the lien, buyers provide notice pursuant to 35 Ill. Comp. Stat. 200/22-5 ("22-5 notice") to the County that the County then mails to the owner. The buyer pays for the mailings to the owner. In addition, if the owner were not to redeem the property within the statutory period and the buyer wishes to petition for a deed, the buyer must file a petition five months before the end of the redemption period and provide notice of the petition pursuant to 35 Ill. Comp. Stat. 200/22-10 ("22-10 notice") to the owners, occupants, or other interested parties to the property. The County sheriff serves the 22-10 notice of the deed petition on the owners, occupants, or interested parties. Certified mail is used to send 22-10 notices to parties residing outside the state.

In the plaintiffs' complaint in this case, the claims center around one of the regulations that the Treasurer's Office has issued for bidding on tax liens: the "Single, Simultaneous Bidder Rule," which prohibits related bidding entities from simultaneously bidding on the same property at the auction, and requires that buyers affirm their compliance under penalty of perjury.*fn2 Under the Single, Simultaneous Bidder Rule, a related bidding entity is "any individual, corporation, partnership, joint venture, limited liability company, business organization, or other entity that has a shareholder, partner, principal, officer, general partner, or other person or entity having an ownership interest in common with, or contractual relationship with, any other registrant" at the annual tax sale. A single bidder may represent several buyers, so long as the bidder is not acting on behalf of multiple buyers at the same time on the same property. The Treasurer or her designated representatives has sole or exclusive discretion to enforce the Single, Simultaneous Bidder Rule. (Dkt. No. 1, Ex. A at 7, "Acknowledgment of Single, Simultaneous Bidder Rule.")

According to the plaintiffs, the defendants violated the Single, Simultaneous Bidder Rule during the 2002, 2003, 2004, and 2005 Cook County tax sales by colluding to act together as related bidders and bidding on the same properties at the lowest penalty rate. The plaintiffs claim that by having more related bidders on each auction, the defendants can purchase from the Treasurer's rotational allocation a greater amount of those properties that receive multiple bids of the lowest percentage penalties.

The plaintiffs assert that the defendants' violation of the Single, Simultaneous Bidder Rule is part of a scheme to defraud the Treasurer and competing buyers of tax liens. According to the plaintiffs, the scheme is structured as follows. Each year before the tax sale, the defendant entities register with the Treasurer's office and sign sworn affidavits that they are not related bidding entities. But before the 2002 tax sale-the first year of the purported scheme-defendant Sabre agreed to act with the other defendant entities as related bidding entities and to have the entities transfer properties that they purchase at the tax sale to Sabre. Beginning in 2002, the plaintiff assert, Sabre directed the defendant entities Regal and DRN II to secretly bid on Sabre's behalf at the auction. During the next several years, more related entities were added or renamed to allegedly bid on Sabre's behalf. The last defendant entities to join the alleged scheme in 2005 were BRB, GJ, Carpus, Mud Cats, whose principals had formerly used the defendant entities CCJ, L.C.C., Optimum, and Jeshay in previous years of the scheme.

Seeking to end this alleged scheme, the plaintiffs filed a lawsuit in this court, alleging substantive RICO violations with the predicate acts of mail fraud and a state claim. The defendants now move to dismiss the complaint, arguing among other issues that the plaintiffs lack standing to bring the RICO claims.

APPLICABLE LEGAL STANDARDS

Claims are subject to dismissal under Rule 12(b)(1) where this court does not have subject matter jurisdiction over the claim. Fed. R. Civ. P. 12(b)(1). For challenges under Rule 12(b)(1), the court may look beyond the complaint to other evidence submitted by the parties to determine whether subject matter jurisdiction ...


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