Federal Civil RICO Violations- Open and Closed Ended Continuity

The Federal Civil RICO statute is a very powerful tool that can provide a litigant Federal Question Jurisdiction and the ability to recover treble damages and attorneys’ fees when otherwise unavailable. However, a major hurdle to successfully pleading and prosecuting a civil RICO claim is making sure that the facts support a showing of the continuity of the scheme as required by the statute and case law.

The RICO Statute

18 USC 1962 (a) “It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.”

Benefits of RICO

  • The ability to bring the lawsuit in federal court based on the federal question jurisdiction created by the RICO violation, which in turn allows all of the state causes of action to be filed in the federal court on the basis of supplemental jurisdiction;
  • Treble damages as opposed to actual damages under state causes of action;
  • Reasonable attorney fees and costs, which are not usually collectible under the state causes of action.
  • Since RICO judgment is premised on fraudulent activity, it is non-dischargeable in bankruptcy.

(March 15, 2004 ed. of THE NATIONAL LAW JOURNAL)

Continuity

In order to state a claim under Civil RICO, Plaintiffs must allege a violation of 18 U.S.C. § 1962, including facts which show “a pattern of racketeering activity.” 18 U.S.C. § 1962. This requires commission of “at least two acts of racketeering activity.” Id. § 1961(5).  Under section 1961, these predicate acts could include violating federal mail and wire fraud statutes. (18 U.S.C. §§ 1341, 1343).  The two predicate act requirement under section 1961 does not define a pattern of racketeering activity so much as it sets a minimum condition for such patterns to exist. H.J. Inc. v. Northwestern Bell Telephone Company, 492 U.S. at 2229.  In H.J. Inc., the Supreme Court held that a pattern of racketeering activity requires the predicate acts be “related, and that they pose a threat of continued criminal activity.” H.J. Inc., supra, 492 U.S. at 239.

A plaintiff in a RICO action must allege either an “’open-ended’ pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a ‘closed-ended’ pattern of racketeering activity (i.e., past criminal conduct ‘extending over a substantial period of time’).” Special Purpose Accounts Receivable Co-op. Corp. v. Prime One Capital Co., L.L.C. 202 F.Supp.2d 1339 (S.D.Fla.,2002), citing H.J. Inc., supra, 492 U.S. at 241.

Closed Ended Continuity

In Homes by Michell, Inc. v. Federal Savings Bank, 733 F.Supp. 1495, 1501 (N.D.Ga.1990) the district court found a series of illegal acts aimed at a single plaintiff spanning two years to be insufficient to amount to a “pattern of racketeering activity.” Hutchinson v. Wickes Companies, Inc., 726 F.Supp. 1315 (N.D.Ga.1989) Similarly, in Fototec Int’l Corp. v. Polaroid Corp., 889 F.Supp. 1518, 1524 (N.D.Ga.1995), the district court found that predicate acts committed by defendants over a fifteen month period did not amount to long-term criminal activity such as to amount to a “pattern” for purposes of RICO. The Eleventh Circuit has held that nine months was too short to constitute a substantial period of time. Jackson v. Bell South Telecommunications,372 F.3d at 1265, 1266  (also citing authority that periods of twenty months or less held are insufficient to constitute a substantial period of time).

Moreover, a single scheme involving a single injury to a single set of victims within a short period of time falls outside of RICO due to lack of continuity. See, Ward v. Nierlich, 617 F.Supp.2d 1226, 1238, 2008 WL 852789, at *10 (S.D.Fla. 2008) (“one scheme, causing harm to a few victims, and causing one injury does not create closed-ended continuity”); Finch v. Finch, 2009 WL 310776, at *6 (S.D.Ill. 2009) (finding no continuity where “[t]he crux of the scheme … was obtaining control over [decedent’s] Estate by forging the Will and Trust Agreement” despite multiple acts of wire or mail fraud)

Similarly, in Kehr Packages, Inc. v. Fidelcor, 926 F.2d 1406 (3d Cir. 1991), the court held that an “eight-month period of fraudulent activity directed at a single entity does not constitute a pattern, absent a threat of future criminal acts.” Id. at 1418.  See also Flip Mortgage Corp. v. McElhone, 841 F.2d 531, 538 (4th Cir. 1988) (holding that fraudulent scheme occurring over several years but impacting only one victim did not constitute RICO violation); Williams v. Equity Holding Corp., 498 F. Supp. 2d 831, 843-44 (E.D. Va. 2007) (finding no continuity where the fraud took place over the course of one year and had the specific purpose of defrauding a single victim).

In effect, to properly plead a closed-ended RICO scheme a substantial history of violative past conduct is required.

Open Ended Continuity

In Aeropower, Ltd. v. Matherly, Aeropower attempted to plead an open-ended scheme by simply stating “conduct” as “part of [their] regular way of doing business” will cause future injury. Aeropower offered no factual allegations which support their conclusory allegation. The Court held that conclusory allegations, alone, were insufficient to survive a motion to dismiss. Aeropower, Ltd. v. Matherly, 511 F.Supp.2d 1139, ( M.D.Ala.,2007). See also  Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1189 (11th Cir.2002) (“[C]onclusory allegations, unwarranted deductions of facts or legal conclusions masquerading as facts will not prevent dismissal.”).

Likewise, the Plaintiff in Ace Pro Sound and Recording, LLC v. Albertson, 512 F.Supp.2d 1259, ( S.D.Fla.,2007) was not permitted to proceed on an open-ended continuity RICO claim, by simply arguing that Defendant Albertson’s alleged economic coercion fits within this framework as being capable of repetition. There, Plaintiff Ace Pro argued that were it to try to enter the music business again, the Defendant could repeat the alleged violations to keep Plaintiff out. Such argument the Court stated, “misses the point; entertaining this line of reasoning would be tantamount to eviscerating RICO’s pattern requirement because almost any conceivable act is capable of repetition. So the question, here, must be whether the racketeering activity inherently includes the potential for repetition in perpetuity. An example of this would be an organized crime or a gang “protection tax” forced upon neighborhood stores with the expectation that mafia members would collect the tax indefinitely at regular intervals. Such is not the case here. The Plaintiff does not allege this type of continuity, and, thus, cannot rely on an open-ended continuity theory to satisfy RICO’s “pattern” element.” Ace Pro Sound and Recording, LLC v. Albertson, 512 F.Supp.2d 1259, ( S.D.Fla.,2007.)

Article by: Andrew Douglas, Esq., Andrew Douglas, P.A., 954.474.4420

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