Commercial Litigation and Arbitration

RICO — Distinctiveness Requirement of § 1962(c) Unsatisfied by Enterprise Alleged to Consist of Defendants (Dentist and PCs He Formed to Defraud Insurer)

From State Farm Mut. Auto. Ins. Co. v. Cohan, 2009 U.S. Dist. LEXIS 125653 (E.D.N.Y. Dec. 30, 2009):

The plaintiff argues, first, that it has sufficiently alleged that the defendants constitute an "association-in-fact enterprise" for RICO purposes. RICO defines an enterprise as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact though not a legal entity." 18 U.S.C. § 1961(4). The Supreme Court, in Turkette, 452 U.S. at 583, defined an enterprise as "a group of persons associated together for a common purpose of engaging in a course of conduct," a definition that was recently reiterated by the court in Boyle, 129 S. Ct. 2237 (2009). Boyle seems, however, to have loosened the requirement that the enterprise must be ascertainably distinct from the pattern of activity. Boyle clarified that an association-in-fact enterprise must have (1) a purpose, (2) relationships among those associated with the enterprise, and (3) sufficient longevity to permit the associates to pursue the purpose. 129 S. Ct. at 2245-46; and see McGee v. State Farm Mut. Auto. Ins. Co., 2009 WL 2132439, *4 (E.D.N.Y. Jul. 10, 2009) (noting that Boyle "establishes a low threshold for pleading [an association-in-fact] enterprise, requiring only 'a group of [entities] associated together for a common purpose of engaging in a course of conduct' . . . pleading a 'hierarchical structure' is not necessary."). Boyle noted that the breadth of Rico's enterprise concept is narrower than that of other federal laws, and that proof of a pattern of racketeering activity may be sufficient in a particular case to permit an inference of the enterprise's existence.... While the allegations in the Complaint here may not have met the requirement that the enterprise and pattern of activity be separate, those allegations do sufficiently plead an association-in-fact enterprise involving the defendants' common purpose and course of conduct with sufficient longevity. That, however, does not end the enterprise inquiry.

...[A] plaintiff must "allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name." Cedric Kushner, 533 U.S. at 161-62.... An associated-in-fact enterprise is a group of persons associated together for a common purpose of engaging in a course of conduct, the existence of which is proven by evidence of an ongoing organization, formal or informal, and by evidence that the various associates functioned as a continuing unit.... The distinctness doctrine requires a plaintiff to demonstrate that each RICO person is legally separate from the RICO enterprise, while the association-in-fact requirements help ensure that distinctiveness is not achieved by simply tacking on entities to the enterprise which do not in fact operate as a "continuing unit' or share a 'common purpose.' ***

Here, the plaintiff defines the enterprise as the "Cohan Dental Network Enterprise," consisting of the individual and corporate defendants.... Paragraphs 87 to 93 of the Complaint summarize the RICO allegations that are made throughout the Complaint, and include, inter alia, claims that Dr. Cohan acted as the owner, sole shareholder, director and officer of the Dental PCs and that the entities acted together such that the "Cohan Dental Network enterprise is distinct from and has an existence beyond the individual Dental PCs and the pattern of racketeering . . ., in that it retained or contracted with technicians, dentists . . . and other administrative personnel to create the false appearance of legitimate dental service providers." *** The Complaint also alleges that Cohan set up each of the Dental PCs, which had no employees of their own, and that "each of the defendants is or was employed by and/or associated with the Cohan Dental Network Enterprise." *** These do not amount to well-pleaded allegations that would allow the court to infer that the Dental PCs are distinct from the enterprise, although such a conclusion can be drawn as to Dr. Cohan.

The Complaint alleges, in essence, that Cohan created the Dental PCs for the sole purpose of perpetrating the fraud against insurance companies. He was the sole shareholder, and the PCs had no other officers, directors or employees. It is difficult, under those circumstances, to imagine how they have any existence outside of the enterprise. The enterprise is merely the corporate "persons," along with Dr. Cohan, by another name. Cohan is the fourth member of the association-in-fact, but he is also a 'person' distinct from it, based on the reasoning in Cedric Kushner. In that case, the Supreme Court considered whether Don King, the president and sole shareholder of a corporation, was a separate person for RICO purposes, where the plaintiff had claimed that he conducted the corporation's affairs as a pattern of racketeering activity. The Court held that a "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 they found "nothing in the statute that requires more 'separateness' than that." 533 U.S. at 163. Thus, Cohan is distinct from the three Dental PCs and, by extension, can be found to be a person distinct from the enterprise comprised of himself in association with the Dental PCs. Cedric Kushner makes clear that RICO liability can be imposed on individual corporate employees, officers or agents who conduct the affairs of their company to engage in racketeering activities, as Cohan has done here.

I find that the Dental PCs are not, based on the allegations in the Complaint, persons distinct from the association-in-fact enterprise, and thus recommend that a default judgment should not be entered against them on that claim.

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