Commercial Litigation and Arbitration

RICO: Parent + Subsidiaries + “Something More” = Association-in-Fact Enterprise

From In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Pracs. Litig., 2009 U.S. Dist. LEXIS 18227 (S.D. Cal. Feb. 5, 2009):

Relying on the text of § 1962(c), courts have consistently held that "the 'person' must be a separate and distinct entity from the 'enterprise.'" Schreiber Distributing Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393, 1396 (9th Cir. 1986). Although the Ninth Circuit has not decided whether a parent and its subsidiary satisfies this distinctiveness requirement, other circuits have decided that these entities generally are not sufficiently distinct. See Bucklew v. Hawkins, Ash, Baptie & Co., LLP, 329 F.3d 923, 934 (7th Cir. 2003); Bessette v. Avco Financial Services, Inc., 230 F.3d 439, 449 (1st Cir. 2000); Fogie v. THORN Americas, Inc., 190 F.3d 889, 898 (8th Cir. 1999); Lorenz v. CSX Corp., 1 F.3d 1406, 1412 (3d Cir. 1993). These courts recognize that the parent and its subsidiary are separate legal entities. However, they also acknowledge that "a subsidiary that simply conducts its affairs as delegated by the parent company for the profit of the parent company is engaged in nothing more than a legitimate corporate and financial relationship, which is certainly not subject to RICO liability on that basis alone." Bessette, 230 F.3d at 449 (citations omitted). Accordingly, these courts require "something more" to satisfy the distinctiveness requirement. See Bucklew, 329 F.3d at 934 (citations omitted) (stating plaintiffs must show that the "decision to operate through subsidiaries rather than divisions somehow facilitated [the enterprise's] unlawful activity"); Bessette, 230 F.3d at 449 (quoting Brannon v. Boatmen's First National Bank of Oklahoma, 153 F.3d 1144, 1148 (10th Cir. 1998)) (same); Fogie, 190 F.3d at 898 (stating "there must be a greater showing that the parent and subsidiary are distinct than the mere fact that they are separate legal entities.").

Without conceding that this is the proper test for distinctiveness, Plaintiffs assert their allegations satisfy this test. They specifically rely on their allegations that:

the participation by the LandSafe subsidiaries in the Countrywide Enterprise allows the enterprise to function more effectively, given that many of the functions provided by these entities, such as appraisals, would normally be conducted by independent entities. LandSafe's participation in the enterprise allows the normal checks and balances within the mortgage process to be eliminated, permitting Defendants to advance their scheme and conceal the fraudulent activity they have been engaging in.


These allegations *** satisfy the "something more" test. Consistent with the Seventh and First Circuits, Plaintiffs allege that the decision to operate through the LandSafe Defendants facilitated the activity of the enterprise by removing a potential for "checks and balances" from the loan process. See Z-Tel Communications, Inc. v. SBC Communications, Inc., 331 F. Supp. 2d 513, 561 (E.D. Tex. 2004) (finding allegations that subsidiaries' actions concealed, masked and facilitated scheme satisfied Bucklew's exception). Plaintiffs also allege that each individual in the Countrywide Enterprise had a distinct role. For instance, CHL was in the business of originating loans, CT provided tax services in connection with the loans, LandSafe Inc. provided a variety of products during the closing process, LandSafe Appraisal Services, Inc. provided appraisal services, etc. See Lorenz, 1 F.3d at 1412 ("the plaintiff must plead facts which, if assumed to be true, would clearly show that the parent corporation played a role in the racketeering activity which is distinct from the activities of its subsidiary.") These allegations satisfy the distinctiveness requirement, and are sufficient to withstand Defendants' motion to dismiss.

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