Commercial Litigation and Arbitration

RICO — Particularity Requirements — Single Fraud Perpetuated over Several Years Lacks Continuity — “Injury Resulting from Mere Subdivisions of One Fraudulent Scheme Is Not Sufficient to Form a Pattern” (Good Quotes)

DeWitt Ins., Inc. v. Horton, 2014 U.S. Dist. LEXIS 72384 (E.D. Mo. May 28, 2014):

Dewitt Insurance, Inc. ("Dewitt") is an insurance management company.... Horton worked for Dewitt as an independent agent and as a "producer" from March 20, 1998 through June 30, 2011..... During some periods, Horton worked for DeWitt as a sole proprietor and, during other periods, he worked through Zigzak, Inc. ("Zigzak") and Cindeb, Inc. ("Cindeb").... Horton led Dewitt to believe that he owned both Zigzak and Cindeb.... In 2000, Horton was working as a sole proprietor and he told DeWitt's John DePond that he was considering forming a company for his insurance business.... DePond told Horton that he could incorporate his business subject to some conditions.... Specifically, DePond told Horton that he had to notify DeWitt prior to transferring any ownership interest in his book of business to anyone else.***

Around the time of this conversation with DePond, on April 10, 2000, Horton formed Zigzak.... Despite the admonition to the contrary, Horton made his daughter, Sarah King, the sole shareholder of Zigzak.... King was only 17 years old when Zigzak was  formed.... King has at all times had access to all of the information of Zigzak and actively participated in Zigzak's activities and business decisions....

DeWitt alleges that Horton and King actively concealed from DeWitt  [*4] the fact that King was the owner of Zigzak and was actively involved in the management of Zigzak....

DeWitt first learned that King was the owner of Zigzak in December 2013.... DeWitt claims that it would not have agreed to do business with Zigzak if DeWitt had known that King owned and controlled Zigzak.... Or, if DeWitt had known that King owned Zigzak, DeWitt would have paid Zigzak at most 60% sales commissions, instead of the 80% sales commissions that it paid.... DeWitt claims that Horton and King's concealment of King's ownership interest and control of Zigzak caused DeWitt to defraud it into paying Zigzak at least 33.33% more commissions than it should have received, based upon King's ownership and control....

In its Amended Complaint, DeWitt alleged the following causes of action: Fraudulent Concealment against Defendant Horton (Count I), Violation of the Computer Fraud and Abuse Act, 18 U.S.C. §1030, et seq. against Defendant Horton (Count II), Fraudulent Concealment against Defendant King (Count III), Violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961, et seq. against Defendants Horton and King (Count  [*5] IV), and Civil Conspiracy against Defendants Horton and King (Count V).


II.  RICO in Count IV

In Count IV, Plaintiff purports to allege a RICO claim against Defendants. Section 1962 of the RICO Act makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt." Nitro Distrib., Inc. v. Alticor, Inc., 565 F.3d 417, 428 (8th Cir. 2009) (quoting 18 U.S.C. § 1962(c)).  [*13] The federal RICO statute "provides a private right of action for any person injured in his business or property by reason of [a RICO violation]." Crest Const. II, Inc. v. Doe, 660 F.3d 346, 353 (8th Cir. 2011) (internal quotation marks and citation omitted); 18 U.S.C. § 1964(c). To demonstrate a RICO violation, the plaintiff must show "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Crest Constr. II, Inc., 660 F.3d at 353 (internal quotation marks and citation omitted). In order to prove the last two elements, a plaintiff must demonstrate that the defendant committed at least two predicate acts of racketeering which are delineated in the statute. 18 U.S.C. §§ 1961(1), (5).

For predicate acts of racketeering, Plaintiff alleges Defendants committed mail fraud and wire fraud, in violation of 18 U.S.C. §1341 (wire fraud) and 18 U.S.C. §1341 (mail fraud), on numerous occasions from 2000 through 2011. (ECF No. 15 at 10-11). Plaintiff alleges several instances where Defendants used the internet, interstate emails, telephone calls to promote their fraud. (Amended Complaint, ¶31).

Defendants contend that Plaintiff's RICO claim fails because it did not  [*14] allege the RICO claim with the particularity required under Rule 9(b) and because it has not stated the essential elements of a RICO claim. Because the Court finds that Plaintiff did not allege a "pattern of racketeering" the Court will dismiss Plaintiff's RICO claim.

Particularity under Rule 9(b)

With respect to allegations of mail or wire fraud such as those contained in the Complaint, Rule 9(b) requires a party alleging fraud to state with heightened "particularity" the circumstances constituting fraud or mistake. Crest Constr. II, Inc., 660 F.3d at 353. In other words, Rule 9(b) requires plaintiffs to plead 'the who, what, when, where, and how: the first paragraph of any newspaper story.'" Summerhill v. Terminix, Inc., 637 F.3d 877, 880 (8th Cir. 2011)(citing Great Plains Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986, 995 (8th Cir. 2007)).

"Federal courts have long held civil RICO complaints to a somewhat higher standard of pleading and required a plaintiff to 'specifically identify, and factually plead, each element of a viable RICO claim.'" Crest Const. II, Inc. v. On Time Auto, 07-0728-CV-W-DGK, 2010 WL 3456690, at *1 (W.D. Mo. Aug. 27, 2010) aff'd sub nom. Crest Const. II, Inc. v. Doe, 660 F.3d 346 (8th Cir. 2011)(quoting Gregory P. Joseph, Civil RICO: A Definitive Guide § 23, at 207 (3rd ed. 2010)).

In their motion, Defendants claim that Plaintiff has not alleged the predicate acts, mail and wire fraud, with particularity and only pleaded a pattern of racketeering activity in a conclusory manner. (ECF No. 14 at 8; ECF No. 16 at 8). Defendants note that "[t]here is no particularity as to what specific items of mail and wire fraud are alleged, how any of the alleged e-mails, telephone calls or mailings were fraudulent, when they specifically occurred, what they contained, when they happened or who did them." (ECF No. 14 at 8-9). Defendants assert that Plaintiff's Amended Complaint contains only formulaic statements that Defendants committed mail and wire fraud, and fails to provide any details as to how this allegedly injured Plaintiff. (Id. at 9). In sum, Defendants contend that Plaintiff's purported RICO action is merely a dressed-up garden variety tort claim, and a RICO claim is not pleaded simply because of Defendants' incidental use of mails and wires. (Id. at 9-10).

In response, Plaintiff asserts that it has sufficiently identified the "who, what, when, where and how" of its RICO claim, as required  [*16] by Fed.R.Civ.P. 9(b). (ECF No. 15 at 6-9); see also Crest Const. II, Inc., 660 F.3d at 353; Summerhill, 637 F.3d at 880. Plaintiff notes that Horton, in Missouri, used interstate telephone calls on an almost daily basis from 2000 until 2011 to DeWitt's employees, DePond and Bommarito in Florida or Texas, and Horton sent interstate emails to DePond, Bommarito and Denise Lowery. (ECF No. 15 at 10). In addition, Plaintiff made interstate telephone calls and sent interstate emails almost daily from July 2000 through January 2012 to DeWitt personnel about his sales and commission. (Id.). Plaintiff further notes that as a result of these actions, DeWitt sent Zigzak a commission check through the U.S. Mail or direct deposit every month from July 2000 through January 2012. (Id.) Specifically, Plaintiff alleges that Defendants used interstate emails and telephone calls in the first part of 2000 to form Zigzak; Defendants exchanged monthly emails from 2000 until 2011 with John DePond and Lowery at DeWitt to report Zigzak's sales and commissions; and Defendants used monthly interstate telephone calls between Horton and DePond and between Horton and Theresa Bommarito to report Zigzak's sales and  [*17] commissions. (Amended Complaint, ¶65). Plaintiff allege that Defendants employed the United States Mail, the internet, email, and telephone, which constitutes mail fraud and wire fraud, in violation of 18 U.S.C. §1961(1)(B). (Amended Complaint, ¶66).

The Court holds that the circumstances allegedly constituting the fraud are stated with sufficient particularity as required by Rule 9(b). Plaintiff alleges the approximate dates that the mail and wire frauds occurred. Plaintiff also alleges the parties involved in setting up Zigzak, the parties who made the monthly telephone calls, and the parties that received the monthly excessive commission checks. Based upon these allegations, the Court finds that the allegedly fraudulent scheme is set out with sufficient reference to the who, what, when, where and how and, therefore, is unpersuaded that Plaintiff's pleading should be dismissed for failure to comply with Rule 9(b).

Pattern of Racketeering

By statute, the "pattern" element requires a plaintiff to show at least two predicate acts of "racketeering activity," which is defined to include violations of specified federal laws, such as the mail and wire fraud statutes. See 18 U.S.C. § 1961(1)(B),(5).  [*18] "Although showing two predicate acts is the only statutory requirement, case law establishes that this is not sufficient to prove a 'pattern'-the plaintiff also must demonstrate that the 'predicates are related, and that they amount to or pose a threat of continued criminal activity.'" Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 15 (1st Cir. 2000)(quoting H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989)); see also Sutherland v. O'Malley, 882 F.2d 1196, 1203 (7th Cir. 1989); see Craig Outdoor Adver., Inc., v. Viacom Outdoor, Inc., 528 F.3d 1001, 1028 (8th Cir. 2008)("[T]o prove a pattern of racketeering activity a plaintiff ... must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.")(emphasis in original). "Courts must examine a number of relevant factors when determining whether the predicate acts alleged are sufficiently continuous to constitute a pattern; these factors include the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence  [*19] of distinct injuries." Sutherland, 882 F.2d at 1204 (internal quotations omitted). "The determination of a pattern of racketeering activity is a factual determination." Terry A. Lambert Plumbing, Inc. v. W. Sec. Bank, 934 F.2d 976, 980 (8th Cir. 1991)(citing H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 242, 109 S. Ct. 2893, 2902, 106 L. Ed. 2d 195 (1989)). "The specific facts of each case must be examined to determine whether the predicate acts relied upon by the plaintiff establish a threat of continuing racketeering activity."  Terry A. Lambert Plumbing, Inc., 934 F.2d at 980 (quoting Sutherland, 882 F.2d at 1204).

"However, RICO 'does not cover all instances of wrongdoing. Rather, it is a unique cause of action that is concerned with eradicating organized, long-term, habitual criminal activity.'" Crest Const. II, Inc, 660 F.3d at 353 (citing Gamboa v. Velez, 457 F.3d 703, 705 (7th Cir. 2006)).

Defendants argue that Plaintiff fails to plead a pattern of racketeering activity. (ECF No. 16 at 7). Defendants assert that mail and wire fraud, without more, does not amount to a RICO claim. (ECF No. 16 at 7-8). Further, Defendants maintain that Plaintiff has failed to identify what fraudulent  [*20] misrepresentations were made in the emails and telephone calls that form the basis of the alleged RICO claim. (ECF No. 16 at 8).

In response, Plaintiff asserts that it has alleged a pattern of racketeering activity through Defendants' activities from July 2000 through January 2012. (ECF No. 15 at 9). Plaintiff alleges a common purpose of defrauding DeWitt out of portions of commissions. (Amended Complaint, ¶63). Plaintiff claims that Horton accomplished this end through "almost daily" interstate telephone calls and emails with DeWitt personnel from 2000 until 2011. (ECF No. 15 at 9).  Plaintiff emphasizes that a pattern is established because Zigzak received commission checks every month for 139 months. (Id.).

Assuming for the sake of argument that commission payments by different checks can constitute multiple predicate acts, the Court nonetheless finds that Plaintiff cannot state a claim under RICO because it has failed to allege the necessary pattern of racketeering activity.

In H.J. Inc. v. Nw. Bell Tel. Co., the Supreme Court rejected a multiple scheme test for the continuity prong of a RICO pattern. H.J. Inc., 492 U.S. 229, 240 (1989). Although the Court acknowledges that under  [*21] H.J. a single scheme can constitute a RICO claim, the "single scheme must still meet the requirements of relatedness and continuity." Terry A. Lambert Plumbing, Inc., 934 F.2d at 981; Larry Good & Associates v. Williams & Co. Consulting, 8:06CV280, 2006 WL 3257180, at *2 (D. Neb. Nov. 9, 2006) ("The Company must allege a pattern of racketeering activity to show continuing activities and distinct schemes in excess of a single injury, which is more than garden variety fraud."). "A single 'scheme' may be reached by RICO, see H.J. Inc., 492 U.S. at 240-41, 109 S.Ct. 2893, but only if it is reasonably broad and far reaching." Sys. Mgmt., Inc. v. Loiselle, 303 F.3d 100, 105 (1st Cir. 2002). "[W]hile acknowledging H.J.'s teaching, ... a number of courts since that decision have found the continuity prong to be absent for allegations involving unlawful activities too small in scale or scope." AB Mauri Food, Inc. v. Harold, 4:07CV811-DJS, 2008 WL 878451, at *3 (E.D. Mo. Mar. 27, 2008)(citing Edmondson & Gallagher v. Alban Towers Tenants Ass'n, 48 F.3d 1260, 1265 (D.C.Cir.1995); Western Associates Limited Partnership v. Market Square Associates, 235 F.3d 629, 634 (D.C.Cir.2001); Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 18-19 (1st Cir.2000)).  [*22] The Eighth Circuit has reasoned that "'it places a real strain on the language [of RICO] to speak of a single fraudulent effort, implemented by several fraudulent acts, as a pattern of racketeering activity.'" Associated Petroleum Producers, Inc. v. Treco 3 Rivers Energy Corp., 692 F.Supp. 1070, 1072 (E.D. Mo. 1988) (quoting Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir. 1986)).

Although Plaintiff has alleged that Defendants engaged in multiple fraudulent acts, the Court holds that the email, mail and wire transfers utilized by Defendants are insufficient to establish a pattern of racketeering because they were, at most, performed as part of a single effort to defraud Plaintiff of some commissions and do not sufficiently allege continuity. (Amended Complaint, ¶67). The alleged predicate acts are Defendants' alleged mail and wire fraud to set up Zigzak and obtain excessive commissions from Plaintiff. Plaintiff's Amended Complaint does not allege that Defendants acted in regard to any other victims, nor does it allege a threat of continued fraudulent activity. Plaintiff has alleged merely a "narrow criminal episode," even if the regular mailings and wire transfers may constitute  [*23] several injuries. Sys. Mgmt., Inc., 303 F.3d at 105; Larry Good & Associates, 2006 WL 3257180, at *2 (citing Madden v. Gluck, 815 F.2d 1163, 1163 (8th Cir. 1987))("Injury resulting from mere subdivisions of one fraudulent scheme is not sufficient to form a pattern of racketeering activity."). There is no allegation that Defendants' fraud or alleged racketeering activity will continue as to Plaintiff or that Defendants' activities threatened or will threaten any other victim. See H.J. Inc., 492 U.S. at 240 ("To establish a RICO pattern it must also be shown that the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity.")(emphasis in original). This case involves only one set of perpetrators, one victim and one fraudulent goal.

Plaintiff alleges no "societal" threat, but rather a directed, targeted injury to a then-employer. See AB Mauri Food, Inc., 2008 WL 878451, at *4. "Viewing the complaint in the light most favorable to the plaintiff, this case involves, at most, a plan to defraud a single company in connection with a single contract." Larry Good & Associates, 2006 WL 3257180, at *3 (dismissing RICO civil claim). A single, fraudulent contractual business venture, which is narrowly tailored toward one victim does not constitute the pattern of racketeering required for criminal activity under a RICO claim. The Court finds that the alleged acts of everyday business emails and the monthly commission checks received by Horton/Zigzak are neither broad nor farreaching enough to constitute a pattern of racketeering under RICO. See Sys. Mgmt., Inc., 303 F.3d at 105.

Further, as noted by several circuit courts, this type of garden variety fraud does not state a claim under RICO simply because Defendants allegedly used the internet, interstate mail, and interstate wires to implement their fraud:

Virtually every garden-variety fraud is accomplished through a series of wire or mail fraud acts that are 'related' by purpose and spread over a period of at least several months. Where such a fraudulent scheme inflicts or threatens only a single injury, we continue to doubt that Congress intended to make the availability of treble damages and augmented criminal sanctions dependent solely on whether the fraudulent scheme is well enough conceived to enjoy prompt success or requires pursuit for an extended period of time. Given its  [*25] 'natural and common sense approach to RICO's pattern element,' we think it unlikely that Congress intended RICO to apply in the absence of a more significant societal threat.

Marshall-Silver Constr. Co., Inc. v. Mendel, 894 F.2d 593, 597 (3d Cir.1990); U.S. Textiles, Inc. v. Anheuser-Busch Companies, Inc., 911 F.2d 1261, 1268 (7th Cir. 1990); see also Menasco, Inc. v. Wasserman, 886 F.2d 681, 685 (4th Cir. 1989)("If the pattern requirement has any force whatsoever, it is to prevent this type of ordinary commercial fraud from being transformed into a federal RICO claim."); Larry Good & Associates, 2006 WL 3257180, at *2 ("The Company must allege a pattern of racketeering activity to show continuing activities and distinct schemes in excess of a single injury, which is more than garden variety fraud."). "Repetitive fraudulent conduct by one set of perpetrators against a single victim, narrowly directed toward a single fraudulent goal-there as here recovering excessive commissions from plaintiff beyond those contemplated by the parties' agreement-is a 'garden variety fraud' rather than a 'pattern' with the species of continuity required for RICO liability." AB Mauri Food, Inc., 2008 WL 878451, at *4;  [*26] Secure Energy, Inc. v. Coal Synthetics, LLC, 4:08CV1719 JCH, 2010 WL 1691327, at *2 (E.D. Mo. Apr. 27, 2010). The Court finds that the fraud alleged in the Amended Complaint is simple, garden variety fraud and does not allege a pattern of racketeering for a RICO action. Applying a "natural and commonsense approach to RICO's pattern element," the Court believes that the facts alleged are no different from those alleged in any common, repetitive fraud claim. See H.J. Inc., 492 U.S. at 237.

Because the Court finds that Plaintiff has not alleged a pattern of racketeering, the Court grants Defendants' Motion to Dismiss the RICO count and dismisses Count IV under Fed.R.Civ.P. 12(b)(6) for failure to state a claim.

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