Commercial Litigation and Arbitration

RICO — “Sole Proprietorship” Law Firm as RICO Enterprise, Lawyer as RICO Defendant

From Wade v. Gaither, 2009 U.S. Dist. LEXIS 17850 (D. Utah Mar. 2, 2009):

*** To establish liability under § 1962(c), "one must allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the 'person' referred to by a different name." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 162, 121 S. Ct. 2087, 150 L. Ed. 2d 198 (2001).

In Cedric Kushner, the Supreme Court found that "no more than the formal legal distinction between 'person' and 'enterprise'" is required… (finding the "distinct entity" requirement met where a wholly-owned corporation and its sole shareholder served as the "enterprise" and "person" respectively). Similarly, in an opinion by Judge Richard Posner, the Seventh Circuit has stated that "a sole proprietorship can be an 'enterprise' with which the proprietor can be 'associated.'" McCullough v. Suter, 757 F.2d 142, 143 (7th Cir. 1985) (cited with approval in Cedric Kushner, 533 U.S. at 163).

The McCullough Court reasoned that a business entity or other organization — even one owned and managed by a single person — can constitute "a group of individuals associated in fact" or an enterprise, so long as "it has any employees." *** "[I]t would be passing strange to exclude proprietorships," though the Court admitted "[t]here would be a problem if the sole proprietorship were strictly a one-man show" since an individual cannot associate with himself…. The McCullough Court further stated:

A one-man band that does not incorporate, that merely operates as a proprietorship, gains no legal protections from the form in which it has chosen to do business; the man and the proprietorship really are the same entity in law and fact. But if the man has employees or associates, the enterprise is distinct from him, and it then makes no difference, so far as we can see, what legal form the enterprise takes. The only important thing is that it be either formally (as when there is incorporation) or practically (as when there are other people besides the proprietor working in the organization) separable from the individual.

Since the sole proprietor in McCullough had "several people working for him; this made his company an enterprise, and not just a one-man band; and all section 1962(c) requires . . . is some separate and distinct existence for the person [ ] and the enterprise."

The entirety of the circuit courts of appeal that have addressed the issue have followed the Seventh Circuit's opinion in McCullough. See e.g., City of New York v., Inc., 541 F.3d 425, 448 (2d Cir. 2008) (citing McCullough and vacating a dismissal of RICO charges where the plaintiff "alleged that [the defendant's] sole proprietorship is not a one-man show."); Jaguar Cars v. Royal Oaks Motor Car Co., 46 F.3d 258, 268-69 (3d Cir. 1995) (adopting McCullough); Guidry v. Bank of LaPlace, 954 F.2d 278, 283 (5th Cir. 1992) (adopting the McCullough rule and dismissing RICO claims where plaintiff did not allege that the defendant sole proprietor had any assistance in his fraudulent scheme); United States v. Benny, 786 F.2d 1410, 1415-16 (9th Cir. 1986) (rejecting defendant sole proprietor's argument that the approach in McCullough was tautological, and finding that since the sole proprietor enlisted the help of four other individuals, his enterprise was a "troupe, not a one-man show."). ***

The Tenth Circuit has not yet decided the issue explicitly, though it has addressed similar matters…. In Brannon [v. Boatmen's First Nat'l Bank, 153 F.3d 1144, 1147-48 (10th Cir. 1998)], the Tenth Circuit refused to adopt a rule "that a mere allegation that the RICO 'person' is the subsidiary conducting the affairs of the parent is sufficient to state a claim under § 1962(c)." The Brannon Court concluded that "in order to state a viable claim under § 1962(c) against a corporation for conducting the affairs of its parent corporation, a plaintiff must, at the very least, allege the parent 'somehow made it easier to commit or conceal the fraud of which the plaintiff complains.'" ***

The logic of Brannon arguably has some applicability to McCullough's theory of the sole proprietorship enterprise. The majority of cases involving the McCullough rule admittedly involve sole proprietorships with multiple employees or associates who clearly played an active role in the conduct of racketeering activities. The Court has found no case where a sole proprietorship with but a single other employee — be it a legal associate or a secretary — who was not alleged to play at least some role in the racketeering activity constituted an enterprise under § 1962(c).

In this case, Plaintiff alleges in his complaint that "Defendant operates his law practice as either a sole proprietorship or through a professional corporation or LLP, and that such criminal conduct alleged herein was perpetrated in association with this 'enterprise.'" *** Plaintiff's complaint indicates that Defendant may, at one point in the course of representing Mr. Wade, have been associated with another attorney and may have collected fees on his behalf, though Plaintiff additionally states that he possesses no evidence that Mr. Gaither having passed any revenue from Wade to any associates. *** Thus it appears plausible that Defendant could be said to have been conducting the affairs of a larger "associated-in-fact" RICO enterprise.

[Footnote 5] Plaintiff's response memorandum additionally asserts that Defendant employees at least one secretary in the operation of his sole proprietorship law firm, and that the secretary attempted on more than one occasion to prevent service of Mr. Wade's complaint.***

It may ultimately be said that the overarching enterprise in this case made it possible for the Defendant to conduct racketeering activities as required in Brannon, though the Court possesses little or no evidence with which to conclude that such is the case. Even if Brannon applies, given the extremely deferential standard of review appropriate when reviewing a motion under Rule 12(b)(6), the Court cannot say at this stage of the proceeding that there is no set of factual circumstances that Plaintiff might prove under which a jury could find that the Defendant was a part of a RICO enterprise.

Compare with this the Twombly-based specificity required by other courts that is summarized in the article RICO Developments 2009 on the Recent Articles page (

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