Commercial Litigation and Arbitration

When Summary Judgment Allowed on Claims Requiring Proof of Intent — RICO Enterprise of Affiliated and Unaffiliated Entities and Employees Upheld — Prejudgment Interest Plus Punitive Damages Permitted, and at Higher State Rate — Good Quotes

In re ClassicStar Mare Lease Litig., 2013 U.S. App. LEXIS 14518 (6th Cir. July 18, 2013):

Defendants argue that summary judgment was inappropriate because there are disputed issues of fact as to whether they intended to defraud Plaintiffs through the Mare Lease Program. Defendants assert that the district court improperly relied only on circumstantial evidence to find the requisite intent and disregarded evidence that they lacked knowledge of the fraudulent scheme. Although Defendants correctly posit that "claims involving proof of a defendant's intent seldom lend themselves to summary disposition," Kennedy v. City of Villa Hills, Ky., 635 F.3d 210, 218 (6th Cir. 2011), summary judgment is appropriate when the evidence is "so one-sided that no reasonable person could decide the contrary," GenCorp, Inc. v. Am. Int'l Underwriters, 178 F.3d 804, 819 (6th Cir. 1999); see also Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989) ("Cases involving state of mind issues are not necessarily inappropriate for summary judgment."). To survive summary judgment, the "mere existence of a scintilla of evidence in support" of a party's position will not suffice. Shropshire v. Laidlaw Transit, Inc., 550 F.3d 570, 576 (6th Cir. 2008) (citing Anderson, 477 U.S. at 252). ***

The federal courts have encountered significant conceptual difficulties when attempting to apply the distinctness requirement in the context of complex relationships among affiliated and non-affiliated corporations and individuals. See, e.g., Haroco, Inc. v. Am. Nat'l Bank & Trust Co. of Chicago, 747 F.2d 384, 401 (7th Cir. 1984) ("Discussion of this person/enterprise problem under RICO can easily slip into a metaphysical or ontological style of discourse — after all, when is the person truly an entity 'distinct' or 'separate' from the enterprise?"). While all courts agree that a corporation cannot be both a RICO "person" and the "enterprise" whose affairs are conducted by that person, see Cedric Kushner, 533 U.S. at 161-62, courts disagree over when and whether a corporate parent can be liable under RICO for participating in an association-in-fact that consists of itself, its owners and employees, and its subsidiaries. Compare Fitzgerald, 116 F.3d at 227-28 (finding that the Chrysler Corporation was not a "person" distinct from the "enterprise" consisting of Chrysler and its dealerships and agents) with Fleischhauer v. Feltner, 879 F.2d 1290, 1297 (6th Cir. 1989) (finding that an individual and his wholly-owned corporations together constituted an "enterprise").

Plaintiffs alleged that Defendants conducted the affairs of an association-in-fact enterprise, which they label the "ClassicStar Enterprise," consisting of each of the Defendants in this appeal, as well as numerous other entities, including Gastar, the Plummers, and NELC. Plaintiffs assert that this group of corporations and individuals formed an association-in-fact enterprise whose affairs were conducted by each of the persons who comprised the enterprise, with the goal of funneling investors' money through the Mare Lease Program and into other interests that they controlled. Defendants dispute the existence of an enterprise sufficiently distinct from GeoStar itself. They argue that the associated entities are in reality merely GeoStar's agents and subsidiaries, and therefore that RICO's distinctness requirement cannot be satisfied.

The number of different approaches to the distinctness analysis roughly mirrors the number of cases that have addressed it. The analysis is so fact-intensive that a generic test is difficult to formulate. The cases run the gamut: some consider a parent corporation and its subsidiaries to be distinct from a RICO enterprise if the parent and the subsidiaries play different roles in the scheme, Lorenz v. CSX Corp., 1 F.3d 1406, 1412 (3d Cir. 1993); some ask whether the corporate persons are distinct from the enterprise in the way that RICO envisions, Fitzgerald, 116 F.3d at 227; and some require that plaintiffs establish differences in corporate decision-making structures and show businesses sufficiently delineated to justify the conclusion that the alleged RICO activity is not the activity of a single, composite entity, see Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344-45 (2d Cir. 1994).***

In 2001, the Supreme Court seemed to revive the separate-legal-identity theory, if only in the narrow context of a corporation wholly owned by a single individual. In Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001), the Court found that the defendant, Don King, was distinct from his wholly-owned corporation for the purposes of RICO. The Court found that because the individual defendant and his corporation were separate legal entities with "different rights and responsibilities," the two were sufficiently distinct. See id. ("[W]e can find nothing in [RICO] that requires more 'separateness' than that.").

Out of the meandering and inconsistent case law from this and other circuits, as well as the Supreme Court's decision in Cedric Kushner, two important principles emerge: 1) individual defendants are always distinct from corporate enterprises because they are legally distinct entities, even when those individuals own the corporations or act only on their behalf; and 2) corporate defendants are distinct from RICO enterprises when they are functionally separate, as when they perform different roles within the enterprise or use their separate legal incorporation to facilitate racketeering activity. Applying these principles in this case reveals that each Defendant is sufficiently distinct from the RICO enterprise to satisfy the statute's distinctness requirement. ***

III. Prejudgment Interest


The Second Circuit has held that the decision to award prejudgment interest "should be a function of (i) the need to fully compensate the wronged party for actual damages suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court." Wickham Contracting Co. v. Local Union No. 3, IBEW, AFL-CIO, 955 F.2d 831, 833-34 (2d Cir. 1992). Because prejudgment interest is compensatory in nature, it should not be awarded if it would result in the overcompensation of the plaintiff. Id. at 834. "Similarly, prejudgment interest should not be awarded if the statutory obligation on which interest is sought is punitive in nature." Id.

Although the Supreme Court has not squarely decided this issue, it has strongly suggested that a treble-damages award under RICO is not punitive in nature. Like treble-damages provisions under the antitrust laws, the damages provision in RICO is "remedial in nature." PacifiCare Health Sys., Inc. v. Bock, 538 U.S. 401, 406 (2003) (distinguishing RICO from treble damages under the False Claims Act, which are "essentially punitive in nature"). RICO damages are "designed to remedy economic injury by providing for the recovery of treble damages, costs, and attorney's fees." Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 151 (1987). "Although there is some sense in which RICO treble damages are punitive, they are largely compensatory in the special sense that they ensure that wrongs will be redressed in light of the recognized difficulties of itemizing damages." Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1310 n.8 (7th Cir. 1987). Because RICO is essentially compensatory in nature, prejudgment interest awards are not categorically inappropriate, as Defendants assert.

Indeed, courts have held that because RICO is essentially compensatory and contains no provision barring prejudgment interest, any such award is within the district court's sound discretion. See Maiz v. Virani, 253 F.3d 641, 663 n.15 (11th Cir. 2001); Abou-Khadra v. Mahshie, 4 F.3d 1071, 1084 (2d Cir. 1993) (describing the district court's discretion as "broad"). Some courts choose to deny requests for prejudgment interest in cases where plaintiffs already stand to receive treble damages under RICO, reasoning that the trebled damages are sufficient to adequately compensate plaintiffs for their losses. See, e.g., Bingham v. Zolt, 810 F. Supp. 100, 101-02 (S.D.N.Y. 1993) (finding that a RICO treble damages award "obviates the need to award prejudgment interest"); Nu-Life Constr. Corp. v. Bd. of Educ. of N.Y., 789 F. Supp. 103, 105 (E.D.N.Y. 1992). Other courts have found such awards are appropriately coupled with treble damages under RICO. See Allstate Ins. Co. v. Palterovich, 653 F. Supp. 2d 1306, 1328 (S.D. Fla. 2009); D'Orange v. Feely, 894 F. Supp. 159, 163 (S.D.N.Y. 1995). At least one district court, in a case involving a large and complex financial fraud involving RICO claims and state-law fraud claims, chose to award prejudgment interest on the plaintiffs' state-law claims but not on their federal RICO claim. See In re Crazy Eddie Sec. Litig., 948 F. Supp. 1154, 1166-67 (E.D.N.Y. 1996). In short, the district court has considerable discretion to fashion a prejudgment interest award in the RICO context.

Prejudgment interest may be particularly appropriate "where treble damages do not adequately compensate a plaintiff for the actual damages suffered, or where a defendant has sought unreasonably and unfairly to delay or obstruct the course of litigation." Bingham, 810 F. Supp. at 102. Plaintiffs argue that Defendants did attempt, at virtually every turn, to delay and obstruct the course of this litigation. None of the individual Defendants agreed to offer testimony, instead asserting their Fifth Amendment rights. They had every right to refuse to testify, of course, but Defendants then denied Plaintiffs other avenues of discovery. For example, the designees of two of GeoStar's subsidiaries were scheduled to be deposed in August 2009. Without any warning, the representatives simply failed to appear on the morning of the deposition, having notified their counsel 45 minutes before that they were unwilling to testify. (See R. 1331, at 2.) No explanation was ever offered for this failure.

A particularly egregious example of Defendants' obstruction occurred when GeoStar's designated witness, its accountant William Bolles, failed to appear for the second and third days of his scheduled deposition. (R. 2441, at 2.) Because each of the other GeoStar principals had refused to testify, Bolles' deposition was extremely important to the development of Plaintiffs' case. The district court sanctioned GeoStar for this failure, finding that Plaintiffs' ability to conduct meaningful discovery into GeoStar's conduct was prejudiced as a result. If we were deciding in the first instance whether these discovery abuses warranted an award of prejudgment interest, we may have chosen not to impose them. However, the discretion to award interest is not ours, but the district court's.7 Because Defendants unfairly delayed the course of litigation and because they provide no strong arguments for why prejudgment interest was inappropriate in this case, the district court did not abuse its "broad discretion" in awarding prejudgment interest to Plaintiffs. ***

Alternatively, Defendants argue that even if an award of prejudgment interest was appropriate, it should have been calculated at the federal interest rate rather than the much higher Kentucky statutory interest rate of 8%. While it is well-accepted that a federal court sitting in diversity should use the state-law interest rate when awarding prejudgment interest, Gentek Bldg. Prods., 491 F.3d at 333, a federal court hearing a federal claim should apply federal common law rules, see Snow v. Aetna Ins. Co., 998 F. Supp. 852, 856 (W.D. Tenn. 1998). Although this may give Defendants some hope, district courts are free to use state law to calculate prejudgment interest even on federal claims. See Ford v. Uniroyal Pension Plan, 154 F.3d 613, 619 (6th Cir. 1998). We have held that the method for calculating prejudgment interest remains in the discretion of the district courts, and they are free to "look to state law for guidance in determining the appropriate prejudgment interest rate" if they so choose. Id.; see also Smith v. Am. Int'l Life Assurance Co. of N.Y., 50 F.3d 956, 658 (11th Cir. 1995). But see Thomas v. iStar Fin., Inc., 652 F.3d 141, 150 (2d Cir. 2010) (applying the federal rate to judgments based on combined federal and state claims).

Defendants provide no reason why the Kentucky statutory interest rate would result in overcompensation to Plaintiffs. Cf. Ford, 154 F.3d at 618-19 (finding that the Michigan statutory rate was inappropriate because legislative history showed that it was partially punitive in nature). As with the district court's decision to impose prejudgment interest, the method for calculating it lies within that court's discretion. Because of the expansive nature of the fraud in this case and Defendants' unfair obstruction of the pretrial proceedings below, we find that the district court did not abuse its discretion when it awarded prejudgment interest at the Kentucky statutory interest rate.

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