Commercial Litigation and Arbitration

“Something More” Is Not Required for Parent + Subsidiary to Constitute a RICO Enterprise — Circuit Split

From Watts v. Allstate Indem. Co., 2009 U.S. Dist. LEXIS 56275 (E.D. Cal. July 1, 2009):

Defendants also argue that a parent corporation is not distinct from its subsidiary for purposes of a section 1962(c) claim. Section 1962(c) requires a person "associated with" an enterprise. 18 U.S.C. § 1962(c). Courts have held that because an entity cannot associate with itself, this language imposes a "distinctness" requirement, such that the person must be distinct from the enterprise. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 160 (2001), Wilcox v. First Interstate Bank, N.A., 815 F.2d 522, 529 (9th Cir. 1987). In other words, the "'enterprise' [can] not simply [be] the same 'person' referred to by a different name." King, 533 U.S. at 160. See also River City Markets, Inc. v. Fleming Foods West, Inc., 960 F.2d 1458, 1461 (9th Cir. 1992) ("The person / enterprise distinction arises from the long-standing common law maxim that a person cannot conspire with himself.").

Unpopular statutes often develop unusual jurisprudence. Thus, in decisions of several other circuits, corporate subsidiaries were found not to be distinct from their corporate parents. 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), Brannon v. Boatmen's First Nat'l Bank, 153 F.3d 1144, 1147 (10th Cir. 1998); Lorenz v. CSX Corp., 1 F.3d 1406, 1412 (3d Cir. 1993). As recently explained by Judge Sabraw in the Southern District of California:

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.

Leyvas v. Bank of Am. Corp. (In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Practices Litig.) , 601 F. Supp. 2d 1201, 1214 (S.D. Cal. 2009) (citing cases from the First, Third, Seventh, and Eighth Circuits).

Neither the Ninth Circuit nor the Supreme Court have directly addressed this issue. *** However, both have considered closely related cases. In United States v. Benny, 786 F.2d 1410 (9th Cir. 1986), the Ninth Circuit held that the owner of a sole proprietorship was distinct from the proprietorship for purposes of 18 U.S.C. section 1962(c). Id. at 1415. The court stated in dicta that the sole stockholder of a corporation was distinct from the corporation, because the corporation's separate existence provides "some legal protections," and because all that is required for distinctness "'is that the [enterprise] be either formally (as when there is corporation) or practically (as when there are other people beside the proprietor working in the organization) separable from the individual.'" Id. at 1416 (quoting McCullough v. Suter, 757 F.2d 142, 144 (7th Cir. 1985), modification in original); accord Emery v. American Gen. Fin., 134 F.3d 1321, 1325 (7th Cir. 1998) ("there is no contradiction or even strain in talking about the 'owner' of a 'corporation' as separate entities."). The Ninth Circuit quoted from Benny and repeated this dicta in Sever v. Alaska Pulp Corp., 978 F.2d 1529, 1534 (9th Cir. 1992). In Sever, the Ninth Circuit again stated in dicta that a sole stockholder was separate from a corporation, and held that officers of a corporation were also distinct from the corporation itself, notwithstanding "the inability of a corporation to operate except through its officers." Id.

The Supreme Court reached a similar result in King, holding that section 1962(c) applies "when a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner — whether he conducts those affairs within the scope, or beyond the scope, of corporate authority." King, 533 U.S. at 166. "The corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status. And we can find nothing in the statute that requires more 'separateness' than that. Cf. McCullough v. Suter, 757 F.2d 142, 144 ([7th Cir.] 1985) (finding either formal or practical separateness sufficient to be distinct under § 1962(c))." Id. at 163.

[Footnote 4] Thus, both the Supreme Court, in King, and the Ninth Circuit, in Sever, have favorably cited the Seventh Circuit's decision in McCullough, which found that either formal or practical separateness sufficed. McCollough therefore carries some weight with this court notwithstanding the fact that the Seventh Circuit did not follow McCullough in concluding that a corporate parent is not ordinarily distinct from a corporate subsidiary. See e.g., Bucklew, 329 F.3d at 934.

In Illinois v. Countrywide Fin Corp. , plaintiffs argued to the Southern District of California that the Supreme Court's decision in King and the Ninth Circuit's decision in Sever supported the conclusion that a parent is per se distinct from its subsidiary. 60 F. Supp. 2d at 1214 n.3. The district court rejected this argument on the ground that King and Sever did not directly consider this question.... Instead, the court "[found] it more appropriate to consider the reasoning of those courts that have addressed this particular issue." ... The court therefore held that to satisfy the distinctiveness requirement, plaintiffs most allege "something more" than the fact that a parent and subsidiary are legally separate entities. Id. at 1214. The court then held that this requirement was satisfied, because plaintiffs had alleged that the decision to act through a subsidiary removed a potential for checks and balances that would have inhibited the racketeering scheme, and that each individual had a distinctive role. Id. at 1214-15.

Plaintiff in this case has not attempted to allege "something more" demonstrating distinctness. Nonetheless, this court must disagree with Countrywide Fin. Corp. and conclude that King and Sever control this case, and that "something more" is not required. King held that the only distinctiveness required was "a legally different entity with different rights and responsibilities due to its different legal status." 533 U.S. at 163. Sever adopted a similar test, and held that formal distinctiveness was itself sufficient, regardless of whether there was also practical separation. 978 F.2d at 1534 (quoting Benny, 786 F.2d at 1416). A separately-incorporated subsidiary satisfies the tests articulated by both King and Sever.

Two additional factors support this conclusion. Both King and Sever concluded that a sole shareholder was distinct from a corporation. King, 533 U.S. at 166; Sever, 978 F.2d at 1534. A corporate parent's relationship with a subsidiary is that of a majority, if not sole, shareholder. Therefore, King and Sever come closer to addressing these facts than Countrywide Fin. Corp. acknowledged.

Furthermore, although this court does not disregard the weight of authority from other circuits lightly, the court takes some reassurance from the Ninth Circuit's recent en banc opinion in Odom v. Microsoft Corp., 486 F.3d 541 (9th Cir. 2007). Odom reiterated that courts "should not read the statutory terms of RICO narrowly." Id. at 547. While "[t]here has been some judicial resistance to RICO, manifested in narrow readings of its provisions by lower federal courts[,] [i]n four notable cases [one of which was King], the Supreme Court has corrected these narrow readings." Id. at 545. From these cases, the Ninth Circuit took the observation that "RICO is to be read broadly" and "be liberally construed to effectuate its remedial purposes." Id. at 547 (quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497-98 (1985)).

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