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RICO — Injury Must Flow from Investment of Racketeering Income under § 1962(a) and Be Caused by Acquisition of Interest under § 1962(b) — Allegation That Parent Is RICO Person and Sub is Enterprise ≠ Distinctiveness under § 1962(c)

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N. Cypress Med. Ctr. Operating Co. v. CIGNA Healthcare, 2015 U.S. App. LEXIS 3711 (5th Cir. Mar. 10, 2015):

This is a dispute over an insurer's obligation to pay a hospital for medical services provided to insured patients. Under the insurance plans, patients are to pay for part of their hospital bills and [*2]  the insurance company covers the rest. The parties dispute whether the hospital may discount patients' portion of the bills without affecting the patients' coverage under their insurance plans.

I.

Houston medical provider North Cypress Medical Center Operating Co., Ltd. and North Cypress Medical Center Operating Co. GP, LLC (collectively, "North Cypress" or "the hospital") sued Cigna Healthcare, Connecticut General Life Insurance Company, and Cigna Healthcare of Texas, Inc. (collectively, "Cigna") for breach of healthcare plans administered or insured by Cigna. North Cypress principally argues that Cigna failed to comply with plan terms and underpaid for covered services. Cigna counter-claimed, arguing that it paid more than was owed; that North Cypress as an out-of-network provider did not charge the patients for coinsurance, but billed Cigna as if it had. The district court dismissed or granted summary judgment on all claims.

***

VII.

North Cypress argues that it properly pled claims under RICO. The district court held that North Cypress failed to state a plausible claim upon which relief could be granted under any RICO provision, and thus dismissed these claims under Rule 12(b)(6).108

108   Mem. and Order of November 3, 2011, 6.

Subsections 1962(a)-(d) of RICO essentially state that:

   (a) a person who has received income from a pattern of racketeering activity cannot invest that income in an enterprise;

(b) a person cannot acquire or maintain an interest in an enterprise through a pattern of racketeering activity;

(c) a person who is employed by or associated with an enterprise cannot conduct the affairs of the enterprise through a pattern of racketeering activity; and

(d) a person cannot conspire to violate subsections (a), (b), or (c).109

Three elements are common to claims brought under any of these subsections: "(1) a person who engages in (2) a pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control of an [*40]  enterprise."110 The district court found that North Cypress presented sufficient facts to plead a pattern of racketeering activity,111 but not the individual RICO subsections. We consider each subsection in turn.

109   Crowe v. Henry, 43 F.3d 198, 203 (5th Cir. 1995).

110   Abraham v. Singh, 480 F.3d 351, 355 (5th Cir. 2007).

111   Mem. and Order of November 3, 2011, 7-10.

A. 18 U.S.C. § 1962(a)

Subsection 1962(a) prohibits a person who has received income from a pattern of racketeering activity from investing that income in an enterprise.112 To state a claim under § 1962(a), North Cypress had to plead: "(1) the existence of an enterprise, (2) the defendant's derivation of income from a pattern of racketeering activity, and (3) the use of any part of that income in acquiring an interest in or operating the enterprise."113 Additionally, North Cypress had to show a nexus between the claimed violations and injury.114 The injury "must flow from the use or investment of racketeering income."115 "[A]lleging an injury solely from the predicate racketeering acts themselves is not sufficient because § 1962(a) does not prohibit those acts."116

112   Crowe, 43 F.3d at 203.

113   St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 441 (5th Cir. 2000).

114   Id.

115   Id.

116   Nolen v. Nucentrix Broadband Networks Inc., 293 F.3d 926, 929 (5th Cir. 2002).

The district court found two deficiencies in North Cypress's § 1962(a) pleading. First, North Cypress did not plead that Cigna used any part of its income to acquire an interest in or operate the alleged enterprise.117 Second, North Cypress did [*41]  not explain how the use or investment of racketeering income injured North Cypress.118 North Cypress does not challenge these two specific determinations, offering only the conclusion that it sufficiently pled a § 1962(a) violation. This is not sufficient. The district court did not err in dismissing this claim.

117   Mem. and Order of November 3, 2011, 11.

118   Id.

B. 18 U.S.C. § 1962(b)

To state a claim under § 1962(b), North Cypress had to show that its injuries "were proximately caused by a RICO person gaining an interest in, or control of, the enterprise through a pattern of racketeering activity"--a nexus requirement.119 The district court found that North Cypress did not successfully plead a nexus between its claimed injuries and Cigna's acquisition or maintenance of an interest in the enterprise.120 On appeal, North Cypress insists in general terms that it successfully pled a § 1962(b) violation, but it does not explain how it showed such a nexus. The district court was correct in dismissing this claim.

119   Abraham, 480 F.3d at 357 (internal quotation marks omitted); see also Vanderbilt Mortg. & Fin., Inc. v. Flores, 735 F. Supp. 2d 679, 701 (S.D. Tex. 2010); Blanchard & Co., Inc. v. Contursi, No. Civ. A. 99-1758, 2000 WL 574590, at *2 (E.D. La. May 11, 2000).

120   Mem. and Order of November 3, 2011, 12.

C. 18 U.S.C § 1962(c)

Subsection 1962(c) "prohibits any person employed by or associated with any enterprise from participating in or conducting the affairs of the enterprise through [*42]  a pattern of racketeering activity."121 To state a claim under § 1962(c), North Cypress had to demonstrate, among other things, "that the RICO person is distinct from the RICO enterprise."122

121   Abraham, 480 F.3d at 357 (internal quotation marks omitted) (emphasis original).

122   Id.

There are two Cigna enterprises involved in this case: Cigna Healthcare, Connecticut General Life Insurance Company ("CGLIC"), and Cigna Healthcare of Texas, Inc. ("CHT"). North Cypress asserts that CGLIC is the "person" under § 1961(c) because it is the parent or controlling company. And that CGLIC "has taken steps to cause [CHT] to be an 'enterprise' for illegal racketeering activities under the guise and direction of Cigna's alleged fee forgiving investigations."123 But, as the district court correctly noted, simply alleging that the parent company is the RICO person and the subsidiary is the RICO enterprise cannot satisfy the distinctiveness requirement.124 Because North Cypress did not sufficiently demonstrate that CGLIC and CHT were distinct, it did not state a plausible claim for relief. The district court was correct in dismissing this claim.

123   Second Amended Original Complaint, ¶ 88.

124   See ISystems v. Spark Networks, Ltd., No. 10-10905, 2012 WL 3101672, at *4-5 (5th Cir. March 21, 2012); Khurana v. Innovative Health Care Sys., Inc., 130 F.3d 143, 155 (5th Cir. 1997), vacated on other grounds by Teel v. Khurana, 525 U.S. 979 (1998); Office Outfitters, Inc. v. A.B. Dick Co., Inc., 83 F. Supp. 2d 772, 779-80 (E.D. Tex. 2000); Compagine De Reassurance D'Ille de France v. New England Reinsurance Corp., 57 F.3d 56, 91-92 (1st Cir. 1995); Lorenz v. CSX Corp., 1 F. 3d 1406, 1411-12 (3d Cir. 1993).

D. 18 U.S.C. § 1962(d)

Subsection 1962(d) prohibits [*43]  a conspiracy to violate §§ 1962(a), (b), or (c).125 To prevail on a RICO conspiracy claim, North Cypress had to demonstrate "(1) that two or more people agreed to commit a substantive RICO offense and (2) that [the defendants] knew of and agreed to the overall objective of the RICO offense."126 Since North Cypress failed to properly plead a claim under §§ 1962(a), (b), or (c), it correspondingly failed to properly plead a claim under § 1962(d).127 The district court correctly dismissed North Cypress's conspiracy claims. The district court was correct in its determination that North Cypress failed to plead a violation under any of the RICO subsections, and we affirm.

125   Word of Faith World Outreach Ctr. Church, Inc. v. Sawyer, 90 F.3d 118, 122 (5th Cir. 1996).

126   Chaney v. Dreyfus Service Corp., 595 F.3d 219, 239 (5th Cir. 2010) (quoting United States v. Sharpe, 193 F.3d 852, 869 (5th Cir. 1999)).

127   See Nolen, 293 F.3d at 930 ("The 'failure to plead the requisite elements of either a § 1962(a) or a § 1962(c) violation implicitly means that [the defendant] cannot plead a conspiracy to violate either section.'") (quoting Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1084 (9th Cir. 2000)); see also Pan Am. Mar., Inc. v. Esco Marine, Inc., No. C.A. B-04-188, 2005 WL 1155149, at *8 (S.D. Tex. May 10, 2005).

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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