Commercial Litigation and Arbitration

RICO Enterprise — Corporation Distinct from Employees If Not Also a Defendant — Merely Defrauding ≠ Operation and Management

The plaintiff insurers in Allstate Ins. Co. v. Rozenberg, 2008 U.S. Dist. LEXIS 104735 (E.D.N.Y. Dec 29, 2008), sued several individuals who set up entities to submit fraudulent no-fault insurance claims for reimbursement of treatment never rendered. The alleged two different enterprises: the first comprised the entities through which the phony claims were submitted (the RICO defendants were the individuals), and the second consisted of plaintiff Allstate Insurance Company (the RICO defendants being all of the individuals and their entities). The first of these worked; the second didn’t:

[Predicate Acts Are Crimes. ] RICO defines “racketeering activity” to include certain predicate criminal acts including mail fraud.

[Corporations Distinct from Employees Where Is Not Also Named Defendants.] In Count I, the Plaintiffs have identified the PC Defendants and the Management Companies as the RICO enterprise, and Inna Polack, Alexander Polack, Rozenberg, Goldman, Shvartsman, Kucherovsky, and Robinson as the so-called RICO persons. ***

In Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 121 S.Ct. 2087, 150 L. Ed. 2d 198 (2001), a corporate promoter of boxing matches sued boxing promoter Don King, the president and sole shareholder of Don King Productions (‘DKP’), alleging that King had conducted a pattern of racketeering activity through DKP. Id. at 161. The District Court dismissed the plaintiff's complaint finding that it failed to meet the distinctiveness requirement. The Second Circuit affirmed the dismissal holding that "King, in a legal sense, was part of, not separate from, the corporation," and that therefore "there was no 'person,' distinct from the 'enterprise,' who improperly conducted the 'enterprise's affairs.'" Id.

The Supreme Court reversed the lower courts, holding that, in such circumstances, the distinctiveness requirement is met because a "corporate owner/employee . . . is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status." Id. at 163. The Court was careful to distinguish the facts in Kushner from an earlier Second Circuit case, Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994), that the Defendants here rely upon.

In Riverwoods, the plaintiffs alleged that the defendant bank had fraudulently coerced them into restructuring loan agreements in violation of RICO. Id. at 341. In their complaint, the plaintiffs alleged that the bank was the RICO person and the RICO enterprise was the bank along with its employees and agents. Id. The Second Circuit found that the distinctiveness requirement could not be circumvented "by alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant . . ." Id. at 344.

However, here, as in Kushner, the Plaintiffs claim that the corporate officers and employees are the RICO persons while the corporations are the RICO enterprise. The legal distinction between the RICO enterprise (the PC and Management Company Defendants) and the RICO persons (the officers and employees of those corporations) is sufficient to satisfy the distinctiveness requirement. See Kushner, 533 U.S. at 164 (noting that such a construction of the distinctiveness requirement comports with the statute's aim to protect "the public from those who would unlawfully use an 'enterprise' (whether legitimate or illegitimate) as a 'vehicle' through which 'unlawful . . . activity is committed.'") (citing Nat'l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 259, 127 L. Ed. 2d 99, 114 S. Ct. 798 (1994)).


[Victim Enterprise & Third-Party Operation and Management.] In Count II, the Plaintiffs argue that Allstate — the alleged victim of the racketeering activity — is actually the RICO enterprise. The Supreme Court has observed that "the enterprise in subsection (c) [of § 1962] connotes generally the vehicle through which the unlawful pattern of racketeering activity is committed, rather than the victim of that activity." Scheidler, 510 U.S. at 259. Although this conception of a RICO enterprise is rarely invoked, the Supreme Court has not foreclosed the possibility that, under certain circumstances, the victim of racketeering activity could also serve as the RICO enterprise. See Com-Tech Assoc. v. Computer Assoc. Int'l, 753 F. Supp. 1078, 1088 (E.D.N.Y. 1990) ("Even though the plaintiffs themselves are also the 'enterprise', it is permissible for the victimized enterprise to sue for damages under RICO, so long as it is alleged that the defendants conducted the enterprise through a pattern of racketeering activity.") (emphasis added).

To analyze this theory of RICO liability, the Court must again turn to the operation and management test. The Plaintiffs appear to claim that the Defendants conducted or participated in the Plaintiffs' affairs by submitting allegedly fictitious insurance claims that affected the insurance companies' claim-paying process. In the absence of any Second Circuit authority supporting the proposition that such conduct is sufficient to satisfy the "operation and management test," the Plaintiffs lean heavily on the First Circuit's decision in Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546 (1st Cir. 1996). In Aetna, the First Circuit upheld a jury verdict for an insurer under § 1962(c) against five automobile body shops, their owners, and several Aetna claims adjusters who had engaged in a scheme to submit fraudulent insurance claims.

***The First Circuit ...[held] that "[b]y acting with purpose to cause Aetna to make payments on false claims, appellants were participating in the 'operation' of Aetna." Id. at 1559. Crucial to the First Circuit's decision was the fact that several of the named defendants were Aetna claims adjusters who were bribed by their co-defendants into submitting false claims. Id. at 1559-60. The First Circuit's reasoning in Aetna has not been well received by courts within the Second Circuit. See Allstate Ins. Co. v. Seigel, 312 F. Supp. 2d 260 (D.Conn. 2004); In re SmithKline Beecham Clinical Lab., Inc. Lab. Test Billing Practices Litig., 108 F. Supp. 2d 84 (D.Conn. 1999).

In Seigel, *** the Court observed that the First Circuit's construction would effectively undermine the operation and management test because "any time a company is defrauded by the conduct of a defendant, one could say that the defendant 'controlled' the company's operations, since absent the fraud, the company would not have done what it did or acted in the manner in which it did." Seigel, 312 F. Supp. 2d at 275. ***

With due respect, the Court finds the First Circuit's construction of the "operation and management," test to be unpersuasive. However, even if the Court did apply this less stringent version of the test, Aetna is clearly distinguishable from the instant case. Significantly, unlike in Aetna, here the Plaintiffs do not allege that any of their employees conspired with the Defendants in the alleged scheme.

In a non-RICO-related holding of interest, Judge Spatt also upheld a claim under N.Y. Gen. Bus. L. § 349 — a consumer fraud statute — on the following line of reasoning: “The fact that the Defendants' alleged scheme would almost certainly result in higher premiums for insurance consumers is sufficient, at this stage, to show that the alleged fraud had ‘ramifications for the public at large.’”

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