Commercial Litigation and Arbitration

Supreme Court Decision in Merck Does Not Apply to RICO — No Equitable Estoppel for Bad Acts after Plaintiff Should’ve Known of Its Injury — Equitable Estoppel v. Tolling — Restricting Boyle: Using vs. Being a Conspiracy/Enterprise

From Jay E. Hayden Found. v. First Neighbor Bank, N.A., 2010 U.S. App. LEXIS 12773 (7th Cir. June 22, 2010):

A foundation created by Jay Hayden, and the estates of his mother and of another woman (R. Maurine Johnson), brought this RICO suit against a bank, two law firms, and seven persons connected with either the bank or the law firms. The suit charges that the defendants (along with others not named as defendants, in particular Robert Cochonour) had formed an informal RICO enterprise that had defrauded the foundation and the estates. Without waiting to file an answer to the complaint, the defendants moved to dismiss the suit pursuant to Rule 12(b)(6), on the ground that the complaint itself showed that the plaintiffs had missed the four-year deadline governing RICO suits. *** The district judge agreed and granted the motion. Although the statute of limitations is an affirmative defense to liability and so ordinarily must be pleaded and proved by the defendant, if it is plain from the complaint that the defense is indeed a bar to the suit dismissal is proper without further pleading. Jones v. Bock, 549 U.S. 199, 214-15, 127 S. Ct. 910, 166 L. Ed. 2d 798 (2007)***.

A defendant who prevents a plaintiff from obtaining information that he needs in order to be able to file a complaint that will withstand dismissal is forbidden, under the rubric of equitable estoppel ("estopped" is the legal term), to plead the statute of limitations for the period in which the inquiry was thwarted. *** Rotella v. Wood, ... 528 U.S. at 561. But if the obstructive behavior occurs after the plaintiff's inquiry has reached the point at which he has discovered, or by exercising reasonable diligence should have discovered, that he has a claim upon which to found a suit, the defendant's obstructionism has no causal significance, see Flight Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 576-77 (7th Cir. 1999), and so is not a ground for an estoppel. Paige v. Police Department, 264 F.3d 197, 199-200 (2d Cir. 2001) (per curiam). Likewise if the defendant's behavior, whenever begun and however ill intentioned, fails to prevent the plaintiff from learning that he has a claim in time to sue within the statutory period. See Flight Attendants Against UAL Offset v. Commissioner, ... 165 F.3d at 577; Dummar v. Lummis, 543 F.3d 614, 621-23 (10th Cir. 2008); cf. Shropshear v. Corporation Counsel of City of Chicago, 275 F.3d 593, 597-98 (7th Cir. 2001). For again the behavior has no causal significance.

We have said (not inconsistently with the qualifications just indicated) that "the plaintiff's lack of due diligence is not a defense [to a claim of equitable estoppel], because the defendant's conduct is deliberate, just as a plaintiff's contributory negligence is not a defense to an intentional tort." Id. at 597; see also Flight Attendants Against UAL Offset v. Commissioner, supra, 165 F.3d at 577. Not all courts agree, see, e.g., Egerer v. Woodland Realty, Inc., 556 F.3d 415, 425 (6th Cir. 2009); Robinson v. Dalton, 107 F.3d 1018, 1023 (3d Cir. 1997), and — more to the point — the Supreme Court has held that when an event occurs that tolls the statute of limitations in either a RICO or an antitrust case, even if the event is fraud by the defendant, the plaintiff cannot fold his hands, sit back, and do nothing until the defendant returns to good behavior. He has to continue investigating diligently, to the extent he can despite the defendants' obstructionism, because the RICO and antitrust statutes seek not merely to protect private rights but also to enlist private plaintiffs in enforcing these laws, which are believed to serve important public purposes. Klehr v. A.O. Smith Corp., 521 U.S. 179, 193-96, 117 S. Ct. 1984, 138 L. Ed. 2d 373 (1997); see also In re Copper Antitrust Litigation, 436 F.3d 782, 790-91 (7th Cir. 2006); Prudential Ins. Co. v. United States Gypsum Co., 359 F.3d 226, 237-38 (3d Cir. 2004). ***

The plaintiffs mistakenly contend that a limitations period does not begin to run until the precomplaint investigation is complete, which may not have been until 2005, three years before they sued. Actually it starts running when the prospective plaintiff discovers (or should if diligent have discovered) both the injury that gives rise to his claim and the injurer or (in this case) injurers. See United States v. Kubrick, 444 U.S. 111, 123-24, 100 S. Ct. 352, 62 L. Ed. 2d 259 (1979), and United States v. Norwood, 602 F.3d 830, 837 (7th Cir. 2010), and with specific reference to the RICO limitations period Barry Aviation Inc. v. Land O'Lakes Municipal Airport Commission, 377 F.3d 682, 688 (7th Cir. 2004); Prudential Ins. Co. v. United States Gypsum Co., supra, 359 F.3d at 233, and Pincay v. Andrews, 238 F.3d 1106, 1108-09 and n. 3 (9th Cir. 2001). The plaintiffs had discovered or should have discovered these things by the summer of 2003. Armed with the information obtained by then they should have been able to complete well within the four-year statutory period an investigation that would have unearthed enough facts to enable them to file a suit that would withstand dismissal. See United States v. Kubrick, supra, 444 U.S. at 122; Lukovsky v. City & County of San Francisco, 535 F.3d 1044, 1049-51 (9th Cir. 2008); Wastak v. Lehigh Valley Health Network, 342 F.3d 281, 287-88 and n. 2 (3d Cir. 2003). They could then have used pretrial discovery to beef up their claim. A plaintiff is not required to have collected, before he files suit, all the evidence he needs in order to win the suit. Otherwise the civil procedure rules would have to authorize precomplaint discovery rather than just pretrial discovery.

In the case of suits under RICO, as Barry Aviation and the other cases cited above explain, the injury arising from the first predicate act to injure the plaintiff ("predicate acts" are the illegal acts committed by the racketeering enterprise) starts the limitations period running, rather than the injury from the last predicate act, which might occur decades after the first, Rotella v. Wood, supra, 528 U.S. at 554; Klehr v. A.O. Smith Corp., supra, 521 U.S. at 186-91. And the victim doesn't have to know he's been injured by a RICO violation, which is to say by a pattern of racketeering activity (that is, a series of predicate acts). Rotella v. Wood, supra, 528 U.S. at 554. The scope and nature of his legal claims are what he has four years to discover, or more (through invocation of tolling doctrines) if he really needs it. For remember that it's the discovery of the injury (and injurer), not of the facts that establish a particular legal theory, that starts the limitations period running; the limitations period is the time allowed to the plaintiff for determining the specific violation upon which to base a suit. That at least is the general rule, though there are exceptions; the limitations period in the Securities Exchange Act of 1934, for example, doesn't begin to run until the plaintiff discovers "the facts constituting the violation." 28 U.S.C. § 1658(b)(1); see Merck & Co. v. Reynolds, 130 S. Ct. 1784, 1796-97, 176 L. Ed. 2d 582 (2010). But RICO requires discovery only of the injury and the injurer.

We said that the defendants' obstructive behavior may have prevented the plaintiffs from obtaining enough information before 2005 to know they'd sustained a legal injury and by whom it had been inflicted. But that did not automatically give them four more years to sue. Tolling doctrines need not extend the date on which the statute of limitations begins to run; for as soon as the tolling events cease — in a case of equitable estoppel, as soon as the defendants' obstructive behavior ceases — the plaintiffs should get to work and file suit as soon as is practicable, in order to minimize the inroads that dilatory filing makes into the policies served by statutes of limitations.

Certainly this is true with regard to equitable tolling, where, through no fault of the defendant (unlike equitable estoppel), the plaintiff has though diligent been unable to discover the injury or injurer within the statutory period. But there is a division of authority over whether the rule should be the same when the basis of tolling is the defendant's misconduct, giving rise to equitable estoppel. As we pointed out in Gaiman v. McFarlane, 360 F.3d 644, 656 (7th Cir. 2004), some cases hold that even in that case the plaintiff "must sue as soon as it is feasible to do so," while "other [cases], distinguishing equitable estoppel, where the defendant is responsible for the plaintiff's delay, from equitable tolling, where he is not, hold that in the former case though not the latter the plaintiff can subtract the entire period of the delay induced by the defendant, or in other words can extend the statutory period by the full amount of the delay," and "at least one case [Buttry v. General Signal Corp., 68 F.3d 1488, 1494 (2d Cir. 1995)] takes a middle position: the plaintiff is presumptively entitled to subtract the entire period" (emphasis in original).

In a RICO case, given the Supreme Court's emphasis noted earlier on the importance of prompt suit to achieve the statute's public purposes, the plaintiff should not be entitled to an automatic extension of the statute of limitations by the length of the period of concealment by the defendants. The injury on which the present suit is based occurred many years before the statute of limitations would have run had it not been for that concealment, for otherwise the plaintiffs would have discovered the fraud; and it is discovery that starts the limitations period running. To litigate a claim so long after the events giving rise to it is bound to be difficult because of lost evidence and faded memories, and the difficulty would be needlessly augmented had the plaintiff no duty of alacrity once the facts that the defendants had improperly concealed are at last in the open. By 2005 the plaintiffs knew so much that they did not need three more years to complete their precomplaint investigation and file suit.

And so their suit is indeed time-barred. But for the sake of completeness we take up the defendants' alternative argument that the complaint fails to allege a RICO violation because the allegations show there was no RICO enterprise.

Until recently we would have said that conspiracy to commit a predicate act is a different animal from a RICO enterprise. *** We would have explained that while RICO enterprises, being illegal, often lack the structure of a legal enterprise, such as a corporation or a public agency (but not always--a RICO enterprise can be a conventional enterprise that has been taken over by crooks, e.g., Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 160-62, 121 S. Ct. 2087, 150 L. Ed. 2d 198 (2001); United States v. Goot, 894 F.2d 231, 239 (7th Cir. 1990); United States v. Kovic, 684 F.2d 512, 516 (7th Cir. 1982); Landry v. Air Line Pilots Ass'n Int'l, AFL-CIO, 901 F.2d 404, 434 (5th Cir. 1990)), and so are often hard to distinguish from conspiracies, the distinction is essential — otherwise the requirement of proving an enterprise and not merely a conspiracy would be read out of the statute. And in this case we have just a conspiracy, between a judge-executor, lawyers, and a bank and its officers, rather than anything that looks even remotely like an enterprise, however informal; for there was no structure, organization, or leadership. ***

But the Supreme Court's recent decision in Boyle v. United States, 129 S. Ct. 2237, 173 L. Ed. 2d 1265 (2009), throws all in doubt. All that Boyle requires of a RICO enterprise is that it have "three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose." Id. at 2244; see also Rao v. BP Products North America, Inc., 589 F.3d 389, 399-400 (7th Cir. 2009); United States v. Hutchinson, 573 F.3d 1011, 1019-22 (10th Cir. 2009). The only difference the Court suggested between such a minimal RICO enterprise and a conspiracy is that conspiracy "is an inchoate crime that may be completed in the brief period needed for the formation of the agreement and the commission of a single overt act in furtherance of the conspiracy." 129 S. Ct. at 2246. Well, the alleged enterprise in this case had purpose and relationships and it certainly had "longevity," and if Boyle is taken at face value nothing more is required to make a conspiracy a RICO enterprise.

Even so, the RICO offense is using an enterprise to engage in a pattern of racketeering activity. 18 U.S.C. § 1962(c); Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993) ("liability depends on showing that the defendants conducted or participated in the conduct of the 'enterprise's affairs,' not just their own affairs" (emphasis in original)); Fitzgerald v. Chrysler Corp., 116 F.3d 225, 226-27 (7th Cir. 1997); Walter v. Drayson, 538 F.3d 1244, 1247-48 (9th Cir. 2008). That element is conspicuous by its absence from this case. Conceivably the defendants who were officers of the bank that is alleged to have assisted Cochonour in his fraud were using the bank (an enterprise) to commit fraud — but that is not alleged. The enterprise alleged is the conspiracy led by Cochonour, who was not using an entity separate from himself (as the bank officers were), for he was the leading conspirator — yet he is not even a defendant. A bank could be accused of fraud without also being accused of conducting itself through a pattern of racketeering activity. The defendants did not use the conspiracy (the enterprise); they were the conspiracy.

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