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Phoenix Bond & Indemnity Co., et al v. John Bridge

September 5, 2012


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:


The plaintiffs in this case asserted claims against a number of defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO) and Illinois law. When a Cook County property owner fails to pay property taxes on time, the past due tax becomes a lien on the property in favor of the County. The County sells the liens at auction. The bids are stated as a percentage penalty that the owner will have to pay to the winning bidder to clear the lien. If the owner does not pay, the lien holder can obtain a "tax deed" and become the property's owner.

Competition typically drives the winning bid to a zero percent penalty, and multiple bidders usually bid zero, more or less simultaneously. This creates a problem of allocation, which the Cook County Treasurer (who conducts the auction) resolves by spreading wins around equitably. This, in turn, creates an incentive for bidders to put multiple agents in the auction or to create related bidders, so that they will have more chances to be awarded liens. The County created a series of rules to prevent this and requires bidders to certify that they do not have certain types of relationships with other bidders. Plaintiffs claimed that the defendants, several groups of related bidders, submitted false certifications and thus had extra related bidders in the auction. As a result, plaintiffs claimed, the defendants acquired more liens, and the plaintiffs (and others who complied with the rules) acquired fewer.

Some of the defendants that the plaintiffs sued settled before trial. A jury returned a verdict in favor of the plaintiffs against most, though not all, of the defendants who went to trial. The jury also awarded compensatory damages, which were trebled under RICO, as well as punitive damages on the state-law claim. The Court later ruled that certain portions of the compensatory damage award were subject to setoff based on the settlements the plaintiffs had concluded with other previously-named defendants.

The defendants against whom the plaintiffs prevailed have moved for entry of judgment as a matter of law or alternatively for a new trial. There are two groups of these defendants, to which the Court will refer as the Sass defendants and the BG defendants, consistent with the shorthand references used at the trial and in earlier briefing.

For the reasons stated below, the Court denies the defendants' motions.

A. Motions for judgment as a matter of law

A court may enter judgment as a matter of law in a party's favor only if "the evidence presented, combined with all reasonable inferences permissibly drawn therefrom, is [not] sufficient to support the verdict when viewed in the light most favorable to the party against whom the motion is directed." Clarett v. Roberts, 657 F.3d 664, 674 (7th Cir. 2011). A jury's verdict may be overturned "only if no reasonable juror could have found in the [prevailing party's] favor." Id. The Court "must construe the facts strictly in favor of the party that prevailed at trial." Schandelmeier-Bartels v. Chicago Park Dist., 634 F.3d 372, 376 (7th Cir. 2011).

1. Deprivation of property

The predicate criminal acts underlying the plaintiffs' RICO claims against the defendants were multiple acts of mail fraud in violation of 18 U.S.C. § 1341. Section 1341 proscribes the use of the mail in furtherance of a "scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises." 18 U.S.C. § 1341. The Supreme Court has interpreted the statute as "limited in scope to the protection of property rights." McNally v. United States, 483 U.S. 350, 360 (1987).

The Sass defendants, joined by the BG defendants, argue that plaintiffs failed to prove violations of section 1341. Specifically, they contend that plaintiffs did not establish that they were deprived of property as that term is understood under the statute. Defendants rely to a significant extent on Cleveland v. United States, 531 U.S. 12 (2000). In that case, the defendant was prosecuted for making false statements to Louisiana authorities to obtain a license to operate video poker machines. The Supreme Court held that section 1341 "does not reach fraud in obtaining a state or municipal license of the kind here involved, for such a license is not 'property' in the government regulator's hands." Id. at 20. Addressing the contention that the state had a right to decide who would get a license, the Court stated that this was not a property right, but an intangible right, specifically, the right to regulate. Id. at 23. The Court concluded its decision by stating that section 1341 "requires the object of the fraud to be 'property' in the victim's hands and that a Louisiana video poker license in the State's hands is not 'property' under § 1341." Id. at 26-27. Defendants argue that the tax liens that were the object of the fraud similarly were not "property in the hands of the victim." See id. at 15.

Cleveland holds that if B defrauds A into transferring something that is not property in A's hands but is property in B's hands, that does not violate section 1341. Here, however, the items transferred -- the tax liens, which represented the right to collect past due property taxes -- were property in the hands of A, namely the County. Thus Cleveland does not control this case. What Cleveland stands for, as the Seventh Circuit has stated, is that mail fraud "require[s] that the object of the fraud is money or property, rather than an intangible right." United States v. Leahy, 464 F.3d 773, 787 (7th Cir. 2006). In this case, the object of the fraud was unquestionably property.

Defendants' real argument appears to be that because the property was never in plaintiffs' hands, there was no violation of section 1341. That, however, is not what Cleveland holds. More specifically, Cleveland does not speak to whether a violation of section 1341 occurs when B defrauds A into transferring property to B rather than C.

Defendants' argument conflates two distinct issues: the question of who is the (primary) mail fraud "victim" with the question of who can sue under the RICO statute. The RICO statute does not say that a victim (as criminal law would define that term) of a pattern of mail fraud can sue. Rather, the statute says that "[a]ny person injured in his business or property" by reason of a RICO violation may sue. 18 U.S.C. § 1964(c). Defendants' argument appears to proceed on the assumption that the RICO plaintiff must be the person who, as a result, of the mail fraud, parted with property under false pretenses. That is not so. Indeed, this question was effectively settled in an earlier appeal in this case, in which the Seventh Circuit and Supreme Court made it clear that the RICO plaintiff need not have relied upon, or even have been the direct recipient of, the perpetrator's false statements. See Phoenix Bond & Indem. Co. v. Bridge, 477 F.3d 928, 932-22 (7th Cir. 2007), aff'd, 553 U.S. 639 (2008).

In sum, the object of the fraud in this case was property in the hands of the recipient of the fraudulent representations, as well as in the hands of the defendants when they received it, and it would have been property in the plaintiffs' hands absent the fraud. To put it another way, the fraud at issue in this case concerned actual property, not merely an intangible right.

Defendants also argue that plaintiffs failed to prove that the County, as the owner of the property transferred due to the fraud, suffered a pecuniary injury, and that for this reason the mail fraud statute was not violated. They base this argument on United States v. Ashman, 979 F.2d 469 (7th Cir. 1992). Ashman concerned futures trading on a commodity exchange that required purchases and sales of commodity futures contracts to be executed via "open outcry" -- bid or offered audibly and openly to all others in a trading pit. The evidence showed that the defendant traders had conducted some trades by prearrangement rather than open outcry. This enabled certain defendants to obtain a guaranteed profit, which they shared with others who assisted in arranging the trades. The Seventh Circuit ruled that in the vast majority of instances, this denied the traders' customers the opportunity to get a better price and thus deprived them of property. Id. at 477-78. The court stated that "the deliberate deprivation of a clear financial opportunity violate[s] the mail fraud statute," and that "[i]t does not matter if the defendants' customers were not harmed financially because of the scheme." Id. at 478. "'It is not necessary that a plan actually result in a financial loss as long as it is aimed at the fraudulent deprivation fo some of the victim's money or property.'" Id. (quoting United States v. Cosentino, 869 F.2d 301, 307 (7th Cir. 1989)).

In a number of situations, however, the evidence showed that traders' customers did not have an opportunity to get a better price. This happened on so-called "limit days," in which the price was essentially fixed because of exchange rules that limited the amount that a commodity price could rise or fall on a given day. On those days, only one price was being traded in the pit, and thus customers could not get a better price. The court ruled that in these situations, the defendants did not deprive the customers of any money or property, but rather only the "intangible" right to obtain the single available price by open outcry rather than by prearrangement. Id. at 479. The government conceded that "no customer lost money" on those trades, arguing only that these trades deprived other traders of the ability to be on the other side of those trades and thus make money. The court stated that this amounted to a contention that open outcry trading by itself constituted a property right protected under the mail fraud law, and it rejected the argument, stating that this was not a deprivation of money or property. Id. The Sass defendants argue that this case is similar because the evidence showed that in the vast majority of situations, only a single price was bid for the tax liens being sold, meaning that the County was no worse off having sold to one bidder rather than to another.

The Court does not agree that Ashman controls this case. In Ashman, the mail fraud victim -- the customer for whom the pit trader was trading -- cared only about price. It did not matter to him who he sold his futures contract to or bought it from. In this case, however, the evidence showed that it mattered to the Treasurer whether it was selling to a bidder eligible to participate in the sale or not. In this regard, the case is more like United States v. Leahy, 464 F.3d 773 (7th Cir. 2006). Leahy involved the City of Chicago's award of certain contracts. A City ordinance required companies that wished to contract with the City to commit to spending particular percentages of the contract's value with subcontractors owned by members of racial or ethnic minority groups or by women. The defendants were charged with mail and wire fraud and with RICO violations because they made false representations regarding the ownership of certain purported minority-owned or women-owned enterprises. The defendants argued that there was no deprivation of money or property. They contended that the City had received exactly what it bargained for, at the same price it would have obtained had everything been on the up-and-up. Thus, the defendants argued, the City "only lost a regulatory interest in controlling exactly where its money went." Id. at 787. They analogized the case to Cleveland, saying that as in that case, the charges implicated only the government's regulatory interests.

The Seventh Circuit rejected this contention. It stated that the scheme had "precisely and directly targeted Chicago's coffers and its position as a contracting property." Unlike in Cleveland, in which the fraud was committed "against a governmental body acting only as a regulator," the scheme in Leahy "was committed both against Chicago as a regulator and also against the city as property holder. The certifications were necessary steps, but they were not the object of the long-ranging fraud. That object was money, plain and simple, taken under false pretenses from the city . . . ." Id. at 788. The court distinguished the case from Ashman on the ground that even though, as in Ashman, the price for the contract may have been inflexible for several reasons, the City had lost the ability to obtain the services for which it had paid from a qualified contractor. Id.

The same is true here. The County unquestionably parted with property, and it did so under circumstances that deprived it of its ability to transfer that property as it wished, to someone it considered eligible to acquire the property. The defendants' fraud was aimed at obtaining property, and it was directed at the County as a property holder, not just as a regulator. Thus under Leahy, the mail fraud statute was appropriately applied.*fn1

The preceding discussion was predicated on the proposition that the County was the mail fraud victim and that the plaintiffs were injured due to the RICO violation that was predicated on the defendants' pattern of mail fraud violations. Plaintiffs have also articulated an alternative theory for sustaining the RICO claim. The Court deals with this only briefly, because the preceding discussion is sufficient without more to require denial of defendants' motion for judgment.

Plaintiffs' alternative theory is that they, along with other eligible bidders at the tax lien sales, were directly victimized by the fraud. At oral argument, plaintiffs' counsel characterized what happened here as a theft of property to which plaintiffs were entitled. The evidence supported this characterization. If an ineligible bidder won a tax lien, he necessarily deprived an eligible bidder of that property. The eligible bidder unquestionably would have obtained the property but for the defendant's fraudulent scheme. To make the case simple, one might hypothesize an auction of a single lien at which there were only three bidders, one of which was eligible and the other two of which were each other's alter egos and thus ineligible. In this situation, if the two ineligible bidders had not deceived the County into allowing them to bid, the third would have gotten the lien. Plaintiffs argue that in this situation, the eligible bidder would have been the victim (or a victim) of mail fraud. The Court agrees. Nothing in Cleveland or the other cases defendants cite requires that to be a victim of mail fraud, a person has to already have the property in question. If it is a certainty that I would have obtained particular property except for the fraud, and you trick someone into transferring it to you rather than to me, then the mail fraud statute is violated, and I am the victim, or at least one of the victims.

The hypothetical scenario is far simpler than what actually occurred; in fact, there were numerous bidders at the actual sale as well as numerous liens offered for sale. But the outcome is no different. If the defendants, as ineligible bidders, had not participated, an eligible bidder would have obtained the liens. Plaintiffs offered, via an expert witness, evidence that it was a virtual certainty that they would have obtained at least one more lien, and the jury was entitled to accept that evidence. (And plaintiffs then offered testimony, which the jury likewise was entitled to accept, that in fact it is likely that they would have obtained many more liens than that.) Plaintiffs unquestionably lost money from this, even if the County might not have. For this reason, even if the absence of a pecuniary loss to the County brings Ashman into play, the RICO verdict may nonetheless be sustained on the theory that the plaintiffs were mail fraud victims (or, more precisely, were among the mail fraud victims) and thus were entitled to sue.

2. Intent to defraud

The BG defendants, joined by the Sass defendants, argue that plaintiffs failed to prove that the defendants acted with the requisite intent to defraud. Defendants' contention is that they relied on a good faith interpretation of the Cook County Treasurer's rules and regulations governing the tax sale. To obtain judgment as a matter of law based on this argument, defendants must show that no reasonable jury could have found otherwise.

Defendants rely on their purported interpretation of the Treasurer's single simultaneous bidder rule. This focus is misplaced, because the evidence permitted the jury to find that defendants engaged in several other material false pretenses and misrepresentations (including concealing material information). The materials that bidders were required to complete to participate in the tax sale required each bidder to make a sworn statement that it did not have finances in common or a common source of funding with any other bidder or an agreement to sell certificates that it won to another bidder. Plaintiffs offered evidence that the BG defendants had common funding sources with other bidders. They also offered evidence from which the jury reasonably could find that the Sass defendants had an agreement in advance to sell certificates that it won but could not redeem to an entity affiliated with John Bridge, one of the defendants who settled.

In addition, as plaintiffs contend, the evidence permitted the jury to find the defendants had violated the single simultaneous bidder rule. See Pls.' Resp. at 7-9. And contrary to defendants' contention, the interpretation of the rule about which certain defendants testified was not the only reasonable interpretation, nor was the jury required to treat defendants' claimed explanation and understanding as credible.

3. Participation in operation / management of RICO enterprise

The RICO statute provides that "[i]t shall be unlawful for any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ," and the RICO conspiracy statute makes it unlawful to conspire to violate this provision. 18 U.S.C. § 1962(c) & (d). The Supreme Court has ruled that [i]n order to "participate, directly or indirectly, in the conduct of such enterprise's affairs," one must have some part in directing those affairs. Of course, the word "participate" makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase "directly or indirectly" makes clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprise's affairs is required.

Reves v. Ernst & Young, 507 U.S. 170, 179 (1993) (footnote omitted). The Court rejected, however, an interpretation that would require a RICO defendant to have "significant control over or within an enterprise." Id. at 179 n.4 (emphasis in original; internal quotation marks omitted). Rather, the Court held that the statute requires proof of participation in the operation or management of the enterprise. Id. at 179.

With regard to the Sass defendants, the enterprise involved John Bridge's establishment of a system for sharing information identifying liens on which participants should or should not bid, as well as what plaintiffs refer to as an "exit strategy" for selling liens that ended up going unredeemed. The Court agrees with plaintiffs that the evidence that the Sass defendants participated in the scheme's design by, among other things, negotiating a pre-sale agreement with Bridge and agreeing in advance to the exit strategy was sufficient to support a finding that they participated in the operation of the enterprise. The fact that Bridge may have used a similar agreement with other bidders, or that Bridge may have been the person who initiated the form of arrangement, does not alter the Court's conclusion. The evidence supported a finding that the Sass defendants made a conscious decision to adopt this ...

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