RICO — Municipal Entities Immune: Not Able to Form Mens Rea, Not Liable for Treble Damages (Which Are at Least Partly Punitive) — Fact of Loss, Not Loss of Legal Entitlement, Sufficient to Show Conclusive Enough Damages

Gil Ramirez Grp., LLC v. Houston Independent Sch. Dist., 2015 U.S. App. LEXIS 8171 (5th Cir. May 18, 2015):

This case, involving multiple causes of action based on allegations of bribery to procure construction contracts, was filed against Houston Independent School District ("HISD" or "the District"), former trustee Lawrence Marshall and his consulting company, alleged coconspirator Joyce Moss Clay and her consulting company, and two of the plaintiff's competitors (RHJ-JOC and Fort Bend Mechanical), and their respective owners. The district court ably resolved most of these kaleidoscopic claims against Plaintiff-Appellants Gil Ramirez, Jr. and the Gil Ramirez Group, L.L.C. (collectively "GRG"), but we conclude GRG has met its summary judgment burden with respect to its RICO claims (against all defendants except HISD) and has sufficiently supported those elements of its claims for tortious interference with business relations that the district court ruled on. For those claims, we reverse and remand for further proceedings. This decision requires resolving [*2]  two novel issues in this circuit-whether HISD is a proper RICO defendant (it is not), and whether Appellee Marshall, a former elected HISD trustee, may invoke state sovereign immunity principles against the state law claims (he cannot).


I.  Racketeer Influenced and Corrupt Organizations Act

GRG sued all defendants under §§ 1962(c) and (d) of RICO, which prohibit, respectively, participation in a racketeering enterprise or conspiring to do the same. In the district court, HISD objected that it was not a proper RICO defendant because as a municipal corporation it cannot form the mens rea of any of RICO's predicate offenses and is not susceptible to RICO's treble damages, which the District characterizes as "punitive." Several other arguments were raised by HISD and other defendants, but the court found instead that GRG failed to assert or prove a cognizable RICO claim. We disagree in part. Our precedent requires a RICO plaintiff to show a "conclusive financial loss" and not harm to "mere expectancy" or "intangible" interests. Price v. Pinnacle Brands, Inc., 138 F.3d 602, 607 (5th Cir. 1998) (per curiam). GRG has created a genuine issue of material fact on this issue. Appellants [*15]  may not, however, sue HISD for RICO violations, because the District is immune from treble damages.

A. Ramirez and GRG as Plaintiffs

1. The Standard

RICO's civil provision creates a cause of action for "any person injured in his business or property by reason of a violation" of any of the statute's prohibited activities. 18 U.S.C. § 1964. At issue here is the injury requirement. The plaintiff's injury must be "conclusive" and cannot be "speculative." In re Taxable Mun. Bond Sec. Litig., 51 F3d 518, 523 (5th Cir. 1995). "Injury to mere expectancy interests or to an 'intangible property interest' is not sufficient to confer RICO standing." Pinnacle Brands, 138 F.3d at 607 (quoting In re Taxable Mun. Bond Sec. Litig., 51 F.3d at 523).8 The district court held thatGRG's alleged injuries were uncertain and intangible because JOC job assignments and contract renewal were at the sole discretion of HISD. "Thus," the district court concluded, "any injury can only be the loss of an expectation interest and therefore speculative[.]"

8.   Following Pinnacle Brands, 138 F.3d at 606, the district court referred to this as "RICO Act standing." Although whether a legislative enactment authorizes a plaintiff to sue is sometimes referred to as "statutory standing," courts should avoid using that term. See Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1387- 88 & n.4 (2014) ("statutory standing" is a misleading label "since 'the absence of a valid . . . cause of action does not implicate subject-matter jurisdiction'") (quoting Verizon Md., Inc. v. Pub. Serv. Comm'n of Md., 535 U.S. 635, 642- 43, 122 S. Ct. 1753, 1758 (2002)).

Appellants contend that they were not required to demonstrate legal entitlement to JOC assignments or job orders, but only the fact of loss. [*16]  That is, although HISD could stop assigning GRG jobs and end the business relationships, it would not have done so but for the alleged corruption. The district court appears to have interpreted GRG as showing only that HISD might have continued favoring GRG.

GRG is correct that a RICO plaintiff need not demonstrate legal entitlement, a point the Supreme Court made clear in Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 128 S. Ct. 2131 (2008). The plaintiffs in Bridge were "regular participants in Cook County's tax sales[,]" in which bids often ended in a tie. Id. at 643, 128 S. Ct. at 2135. The county would then allocate the auctioned property on a rotational basis. Id. at 642, 128 S. Ct. at 2135. In order to make this process fair, each bidder was permitted only one simultaneous bid. Id. at 643, 128 S. Ct. at 2135. The plaintiffs alleged that a competing corporate bidder [*17]  had arranged for false-flag bidders to channel additional allocations. Id. The Bridge plaintiffs had no legal entitlement to the subject matter of the auction. Nevertheless, the Supreme Court held that "[a]s a result of petitioners' fraud, respondents lost valuable liens they otherwise would have been awarded." Id. at 649, 128 S. Ct. at 2139. Because the fact of loss was certain, the plaintiffs could state a RICO claim.

Although the vagueness of terms like "expectancy" may have created some confusion, the context of our cases makes clear that the test is a factual one. In Pinnacle Brands, for instance, plaintiffs complained that the random inclusion of valuable "chase" cards in packs of baseball cards constituted "illegal gambling." 138 F.3d at 605. This court held that the plaintiffs could not show injury under RICO because they suffered no harm to a property interest; the card packs they bought were exactly what they bargained for. Id. at 607. Pinnacle Brands thus stands for the unremarkable proposition that a RICO plaintiff must demonstrate harm. The court's rejection of "mere expectancy interests" appears to have been directed at the notion that the plaintiff was injured by not having any luck in drawing a chase card. See id. That [*18]  is, damage to a plaintiff's subjective expectations cannot form the basis of a RICO claim.

Likewise, in In re Taxable Municipal Bond Securities Litigation, the plaintiff (for himself and others similarly situated) claimed that corruption in a state-authorized municipal bond program injured certain farmers and ranchers who might have applied for loans under that program. 51 F.3d at 521-22. The loans under the program were loans of last resort, unavailable to those who could obtain other credit. Id. at 522. At least some of the farmers and ranchers had pursued and secured other loans with higher interest rates, which disqualified them for loans under the bond program. Id. The court held that the farmers and ranchers "have suffered no injury from not receiving what they were ineligible to receive." Id. at 522. The court further held that the plaintiff had not demonstrated detrimental reliance, and that a lost opportunity to obtain a loan was too speculative. Id. at 522-523. Importantly, the plaintiff "ha[d] not alleged lost profits" or "that [the farmers and ranchers] ha[d] ever lost money as a result of the RICO scheme." Id. at 523. GRG alleges both. Accord [*19]  Tel-Instrument Elecs. Corp. v. Teledyne Indus., Inc., No. 90-1549, 1991 WL 87194 (4th Cir. May 28, 1991).

The rule that emerges from these cases is that loss of a legal entitlement is sufficient but not invariably necessary to sustain a RICO claim. A plaintiff need not show that the other party would have been obliged to confer a benefit, only that the other party would have conferred the benefit. That HISD retained discretion to award fewer contracts, or no contracts at all, does not prohibit GRG from demonstrating that but for corruption, it would have continued to receive awards.

2. The Evidence

The standard now clarified, it remains to determine whether GRG has marshaled competent summary judgment evidence that its business was injured. The proof covers two periods of time, differentiated by GRG's status as a JOC contractor in 2009 and its subsequent failure to be chosen in the 2010 RFP process.

The district court acknowledged that evidence of factual loss might be sufficient, but found that GRG had not met this burden with respect to the contract renewal. GRG points to evidence that several Board members and a high-level administrator led Ramirez to believe that GRG's contract was on the verge of renewal. As the district court noted, "[t]hese assurances [] were made before it was revealed to the HISD Board's audit committee that the same high-level administrator had bypassed the JOC contract procurement process unilaterally to award GRG with a contract in the first place." GRG challenges that audit of the 2008 RFP as improperly motivated, but does not undermine the fact that the initial RFP was tainted nor does it allege that re-bidding the program was the wrong course of action. GRG also faults the District's decision to select only four JOC vendors. Even viewed in the light most favorable to GRG, however, none of this evidence shows that GRG would have been chosen in the 2010 RFP but for corruption. Indeed, GRG's tenth-place ranking was so low that even if HISD had selected seven vendors [*21]  and eliminated the vendor defendants, GRG still would not have been selected. In short, GRG has not adduced sufficient evidence to overcome summary judgment as to its nonselection in the 2010 RFP.

The sudden decline in JOC assignments in 2009, however, is another matter. The District assigned GRG more work than any other contractor in the initial honeymoon period of the 2009 JOC program, and GRG won 42 of the 64 projects it "bid on" in 2009. The confluence of events in August 2009- Superintendent Saavedra's testimony that his resignation was driven by his dispute with Marshall, RHJ's latter-day and questionable addition to the JOC program, the drop-off in assignments to GRG-would allow a jury to infer [*22]  that undue influence on and by Marshall harmed GRG's business.

Appellees offer plausible explanations why GRG's assignments dropped off, but none of these positively displaces the possible inference of corrupt influence. For example, vendors not alleged to have bribed Marshall continued to receive work after RHJ entered the picture. But GRG has produced evidence suggesting that Marshall's preferred vendor RHJ was displacing GRG after Ramirez spurned Marshall. Further, Appellees' expert noted that if GRG had continued to receive work at the same rate as it did the first two months, it would have been awarded over 100% of all JOC expenditures. But the drop off in total JOC volume may itself have been part of the alleged scheme. These are matters for the factfinder. We hold only that the evidence creates a fact issue as to the cause of the loss of GRG's JOC assignments.

Appellees urge many other grounds for affirming summary judgment on the RICO claims. "Although this court may decide a case on any ground that was presented to the trial court, we are not required to do so." Breaux v. Dilsaver, 254 F.3d 533, 538 (5th Cir. 2001). Because the issues require consideration of a voluminous record, "we decline to decide these complex issues as they [*23]  are better addressed by the district court in the first instance."  Lone Star Nat'l Bank, N.A. v. Heartland Payment Sys., Inc., 729 F.3d 421, 427(5th Cir. 2013).11

11.  By noting two particular issues that will be pertinent on remand, we do not presume to eliminate others raised by the Appellees. First, RICO claims require showing that the unlawful behavior proximately caused the plaintiff's injuries. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268, 112 S. Ct. 1311, 1317 (1992). A threat to a finding of proximate cause here may lie in HISD's use of third-party project managers to administer its JOC assignments. The factfinder will have to determine whether GRG's injury "flows" from the RICO violations. Khurana v. Innovative Health Care Sys., Inc., 130 F.3d 143, 150 (5th Cir. 1997), abrogated on other grounds by Beck v. Prupis, 529 U.S. 494, 120 S. Ct. 1608 (2000). Second, the permissible scope and extent of damages is also a matter for the district court to determine on remand. GRG's expert estimates the company lost 18 jobs-JOC assignments GRG would have received but for Marshall's improper influence-totaling $177,307. Based on the same data, a defense expert calculated the range of damages between $16,776.76 and $145,032.96. The defendants also challenge the reliability and thus admissibility of GRG's expert report.

B. HISD as a Defendant

HISD contends that school districts are not proper RICO defendants for two reasons. First, RICO requires demonstrating an underlying criminal act, which entails a mens rea requirement that a governmental entity cannot form.  Lancaster Cmty. Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397, 404 (9th Cir. 1991); see also Pedrina v. Chun, 97 F.3d 1296, 1300 (9th Cir. 1996) (reaffirming Lancaster).12 Second, municipal entities enjoy common law immunity from punitive damages, and, whatever [*24]  else it is, RICO's treble-damages provision is at least partially punitive. Genty v. Resolution Trust Corp., 937 F.2d 899, 908 (3d Cir. 1991). These reasons have proven persuasive to other courts.13 We agree with these holdings.

12.  Several district courts in this circuit have also recognized "strong authority that governmental entities, such as counties or government agencies, cannot be proper RICO defendants." Dale v. Mo. Governor Jay Nixon's Office, No. CIV.A. C-11-114, 2011 WL 1810321, at *3 (S.D. Tex. May 10, 2011); see also Nationwide Pub. Ins. Adjusters Inc. v. Edcouch-Elsa I.S.D., 913 F. Supp. 2d 305, 308 (S.D. Tex. 2012); Dammon v. Folse, 846 F. Supp. 36, 38 (E.D. La. 1994); La. Power & Light Co. v. United Gas Pipe Line Co., 642 F. Supp. 781, 806 (E.D. La. 1986).

13.  Either of these theories-the inability to form a mens rea or immunity from punitive damages-might suffice to remove HISD from RICO's ambit in this case. There are also sound policy reasons for this conclusion:

[T]he . . . theories for refusing to hold a municipal entity liable under RICO are not mutually exclusive-indeed, it can be said that they are two sides of the same concept. In an abstract but doctrinal sense, a corporation in and of itself cannot form mens rea. Similarly, a corporation, [*25]  that is, the institutional construct itself, cannot be deterred; deterrence can only be achieved by targeting the behavior of the people who determine corporate conduct. Thus, if punitive damages would not operate to encourage innocent and essentially powerless taxpayers to prevent RICO's condemned activity by municipal officials, short of the election process, it would seem inappropriate to hold the municipal corporation liable.

Dammon, 846 F. Supp. at 38.

A particularly good reason for rejecting governmental RICO liability stems from judicial reluctance to impose punitive damages on the public fisc. The Supreme Court has held that a municipality's liability for § 1983 damages does not thereby subject it to punitive damages, from which government entities were historically immune. City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 263, 101 S. Ct. 2748, 2758 (1981). City of Newport emphasized that because a public entity itself "can have no malice independent of the malice of its officials," 453 U.S. at 267, 101 S. Ct. at 2760, punishment by punitive damages would be inequitably assessed against the public. Moreover, "the deterrence rationale of § 1983 does not justify making punitive damages available against municipalities." Id. at 268, 101 S. Ct. at 2160.14

14 When the Supreme Court held that municipal entities were liable under federal antitrust law, it "understandably [left] open the question whether municipalities may be liable for treble damages[.]" Cmty. Commc'ns Co. v. City of Boulder, Colo., 455 U.S. 40, 65, 102 S. Ct. 835, 848 (1982) (Rehnquist, J., dissenting). Before there was occasion for the high court to resolve that question, Congress exempted governmental units from all monetary damages. Local Government Antitrust Act of 1984, Pub. L. No. 98-544, 98 Stat. 2750 (1984), codified at 15 U.S.C. §§ 34-36[.]

City of Newport held that, [*26]  to overcome municipal immunity from punitive damages, Congress must clearly express its intention. Id. at 263, 101 S. Ct. at 2749. No such clear intent to overcome governmental immunity appears in the RICO provision for treble damages.

GRG, however, fastens hope on the Supreme Court's ambiguity about treble damages, "which have a compensatory side, serving remedial purposes in addition to punitive objectives." Cook Cnty., Ill. v. U.S. ex rel. Chandler, 538 U.S. 119, 130, 123 S. Ct. 1239, 1246 (2003). The Supreme Court locates "different statutory treble-damages provisions on different points along the spectrum between purely compensatory and strictly punitive awards." PacifiCare Health Sys., Inc. v. Book, 538 U.S. 401, 405, 123 S. Ct. 1531, 1535 (2003). Treble damages provisions designedly go well beyond the amount of actual harm, but the Supreme Court has "repeatedly acknowledged that [*27]  the treble-damages provision contained in RICO itself is remedial in nature." PacifiCare, 538 U.S. at 406, 123 S. Ct. at 1535.

The Court's ambivalence about punitive damages complicates analysis here, but we believe PacifiCare cannot salvage a claim against HISD. First, the Supreme Court's characterization of RICO treble damages as "remedial" in PacifiCare cannot substitute for an express Congressional abrogation of municipal immunity from treble damages, which, whatever the characterization, exceed actual provable damages. To hold otherwise would mock City of Newport. Second, nothing in PacifiCare contravenes the Court's earlier holdings that treble-damages provisions serve both compensatory and punitive functions. See Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 240, 107 S. Ct. 2332, 2345 (1987); accord Genty, 937 F. 2d at 910 ("there is convincing authority that Congress authorized civil RICO's powerful treble damages provision to serve a punitive purpose").15 Third, the narrow question posed in PacifiCare was whether an arbitration agreement's ban on punitive damages included RICO treble damages. The Court refused to interpret the private parties' agreement, holding that threshold duty for an arbitrator. PacifiCare has no bearing on the liability of governmental entity defendants for treble damages under RICO.

15 Albeit in non-precedential opinions, the Third Circuit has continued to apply Genty since PacifiCare was decided. Tengood v. City of Philadelphia, 529 F. App'x 204, 209 n.4 (3d Cir. 2013) (unpublished) (rejecting argument that PacifiCare abrogated Genty); Heinemeyer v. Twp. of Scotch Plains, 198 F. App'x 254, 256 (3d Cir. 2006); Kadonsky v. New Jersey, 188 F. App'x 81, 85 (3d Cir. 2006). See also Cranberry Promenade, Inc. v. Cranberry Twp., No. CIV. A. 09-1242, 2010 WL 653915, at *4 (W.D. Pa. Feb. 22, 2010).

For these reasons, [*28]  we conclude that GRG cannot proceed against HISD under RICO's mandatory treble damage provision. Because Congress wrote no single-damage alternative, and we lack power to revise federal statutes, Appellants fail to state a cognizable RICO claim against HISD. See Cullen v. Margiotta, 811 F.2d 698, 713 (2d Cir. 1987) ("civil RICO requires that a successful plaintiff be awarded treble damages").

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