NORTH CAROLINA'S RICO ACT

Transcription

1 NORTH CAROLINA'S RICO ACT I. Overview Perhaps no statutory cause of action has engendered as much controversy, derision, and misunderstanding as civil RICO ("Racketeer Influenced and Corrupt Organizations"). From its inception, given its inauspicious title, RICO (both civil and criminal) was naturally assumed to be aimed solely at criminal organizations such as the mafia, inner-city gangs, and the lot. Originally a federal creature, civil RICO, 18 U.S.C , provided a private civil cause of action to recover mandatory treble damages for injury "by reason of a violation of" its substantive provisions. See 18 U.S.C. 1964(c). However, any idea that federal civil RICO was for "mobsters and organized criminals" only was soon dispelled by the United States Supreme Court's holding in Sedima, S.P.R.L. v. Imrex Company, 473 U.S. 479, 499, 105 S.Ct. 3275, 3286 (1985). The Sedima Court explicitly recognized that "[civil] RICO [had] evolved into something quite different from the original conception of its [Congressional] enactors." Id. Instead, the Sedima Court observed, civil RICO "ha[s] become a tool for everyday fraud cases brought against respected and legitimate enterprises." Id.(quoting the holding of the Court below, Sedima, 741 F.2d 482, 487 (2d Cir. 1984)). In sum, the Sedima Court determined, [t]he fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth. Id. (citation omitted). II. North Carolina's Civil RICO Act A. Applicable Statutes North Carolina's civil RICO act was ratified by our legislature about one year after the United States Supreme Court's ruling in Sedima. See Kaplan v. Prolife Action League of Greensboro, 123 N.C.App. 720, 724, 475 S.E.2d 247, 251 (1996), aff'd, 1997 WL (N.C. Nov. 07, 1997). Patterned substantially after its federal counterpart, North Carolina's civil RICO act (the Act ), N.C. Gen. Stat. 75D-4 (1990), contains the following prohibitions: (a) No person shall: (1) Engage in a pattern of racketeering activity or, through a pattern of racketeering activities or through proceeds derived therefrom, acquire or maintain, 1

2 directly or indirectly, any interest in or control of any enterprise, real property, or personal property of any nature, including money; or (2) Conduct or participate in, directly or indirectly, any enterprise through a pattern of racketeering activity whether indirectly, or employed by or associated with such enterprise; or (3) Conspire with another or attempt to violate any of the provisions of subdivision (1) or (2) of this subsection. (b) Violation of this section is inequitable and constitutes a civil offense only and is not a crime, therefore a mens rea or criminal intent is not an essential element of any of the civil offenses set forth in this section. The Act, at 75D-3(c)(1) and (2), defines "racketeering activity" in the following all-encompassing fashion: to commit, to attempt to commit, or to solicit, coerce, or intimidate another person to commit an act or acts which would be chargeable by indictment... under [Article 5 of Chapter 90 of the General Statutes, or under Chapter 14 of the General Statutes (excepting certain sections)]... [or as]... any conduct involved in a "money laundering" activity [or as]... [any conduct described as] "[r]acketeering activity" [by the federal RICO statute, as] descri[bed] in Title 18, United States Code, Section 1961(1). Finally, at 75D-8(c), the Act enumerates the following remedy (among others), which is the focal point of this paper: Any innocent person who is injured or damaged in his business or property by reason of any violation of G.S. 75D-4 involving a pattern of racketeering activity shall have a cause of action for three times the actual damages sustained and reasonable attorneys fees. For purposes of this subsection, "pattern of racketeering activity" shall require that at least one act of racketeering be an act of racketeering other than (i) an act indictable under 18 U.S.C ["mail fraud"] or U.S.C ["wire fraud"], or (ii) an act which is an 2

3 offense involving fraud in the sale of securities. Any person filing a private action under this subsection must concurrently notify the Attorney General in writing of the commencement of the action.... (Emphasis added.) B. The Dynamic of the Statute: Predicate Acts and Injuries to Business and Property The RICO statutory framework puts some powerful tools at the plaintiff's disposal. Under North Carolina's civil RICO framework, persons who engage in the commission of at least two predicate acts of racketeering ("predicate acts"), as defined by N.C. Gen. Stat. 75- D3, and who thereby injure another in his business or property, may be held liable for their wrongdoing. As shown by 75-D3, the limits of what may constitute a predicate act are bounded primarily by the creativity of the lawyer. Everything from "[o]btaining property by false pretenses," N.C. Gen. Stat (1993), to "[m]alfeasance of corporat[e] officers and agents," N.C. Gen. Stat (1993), to the litany of offenses outlined by 18 U.S.C. 1961(1), to the old stand-bys, mail and wire fraud, can serve as predicate offenses. 1. Showing a Pattern of Predicate Acts If the plaintiff can show at least two predicate acts within four years of each other, the ends of which are "interrelated by distinguishing characteristics," and which are "not isolated and unrelated," and at least "one of these incidents occurred after October 1, 1986," you have the ingredients of a "pattern." It should be noted that the standard of proof for a predicate act is different in the civil context from the criminal. In the civil setting, the plaintiff need only establish her proof by a preponderance of the evidence. See Sedima, 473 U.S. at , 105 S.Ct. at 3282; and see The Hon. David B. Sentelle, Civil Rico: The Judges' Perspective, and Some Notes on Practice for North Carolina Lawyers, 12 Campbell L. Rev. 145, (1990)(casting a disdainful eye at civil RICO). Thus, to survive a motion to dismiss, the plaintiff need only meet the pleading standards inherent to any complaint under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. a. What Constitutes a Pattern? Frankly, no one knows the answer to this question. Various attempts have been made to offer litigants guidance on this issue, with little definitive success. See, e.g., H.J. Inc. et al. v. Northwestern Bell, 492 U.S. 229, , 109 S.Ct. 2893, (1989)("A pattern is an arrangement or order of things or activity"). N.C. Gen. Stat. 75D-3(b) speaks of "at least two" predicate acts, 3

4 but goes on to refine the term by using words such as "interrelated" and "not isolated." Without question, under North Carolina's Act, two predicate acts, in and of themselves, may not be enough. Instead, as the H.J. Inc. Court stated, no standard for what constitutes a "pattern of racketeering activity" can be "fixed in advance with [] clarity... [and such a determination] must await future cases, absent a decision by Congress to revisit RICO to provide clearer guidance as to the Act's intended scope." Id., 492 U.S. at 243, 109 S.Ct. at North Carolina cases do not shed much light on the subject either. There are only three North Carolina state court cases which discuss civil RICO at any length: Kaplan, supra (discussing the North Carolina Act), Hoke v. E.F. Hutton, 91 N.C.App. 159, 370 S.E.2d 857 (1988)(discussing the federal version of civil RICO as applied by our state courts), and Thornburg v. Lot and Buildings at 800 Waughtown St., 107 N.C.App. 559, 421 S.E.2d 374 (1992)(discussing the forfeiture provision of North Carolina's Act). 1 None of these cases offers an in-depth treatment of RICO s pattern requirement. b. Guidance from the North Carolina decisions Unfortunately, only two North Carolina cases, Kaplan (a 2-1 decision), and Thornburg, 107 N.C.App. at , 421 S.E.2d at 376 (1992)(a forfeiture case), discuss, at any length, the "pattern" requirement of RICO. 1. The Kaplan decision In Kaplan, a medical doctor and his family (the "Kaplan plaintiffs") sued an anti-abortion organization and its members for picketing the family's residence and the doctor's place of business. Kaplan, 123 N.C.App. at 722, 475 S.E.2d at 250. The Kaplan plaintiffs, through their North Carolina civil RICO claim, alleged that the antiabortion group had committed predicate acts such as: "extortion; conspiracy to extort; attempted extortion; communication of threats; and transmittal of threatening writings." Id. at 724, 475 S.E.2d at 251. According to the Kaplan Court, plaintiffs contended "that, taken together, defendants['] alleged acts represent a pattern of racketeering activity prohibited under section 75D-4." Id. Thus, summary judgment should not have been granted on this issue. 1 It is now well-established that state courts enjoy concurrent jurisdiction with federal district courts over federal civil RICO claims. Tafflin v. Levitt, 493 U.S. 455, 467, 110 S.Ct. 792, 799 (1990); and see E.F. Hutton, 91 N.C.App. at 161, 370 S.E.2d at

5 The response of the Kaplan Court to the racketeering pattern issue was less than illuminating. With almost no ado, the Court stated: We assume, without deciding, that plaintiffs have offered sufficient evidence of a pattern of racketeering activity prohibited under section 75D-4." Neither the Kaplan majority, nor the lone dissenter, now retired Judge Clifton E. Johnson, expressed any comment as to just what facts, or how many, were necessary to reach this conclusion. Thus, the practitioner, reading Kaplan, is left to assume that the combination of pickets, organized demonstrations, and boycotts, spoken of sporadically throughout the opinion, formed the factual basis for the allegations of the predicate acts such as communicated threats. Furthermore, it must be assumed (given the subject matter giving rise to the RICO claim) that the pickets, etc., were interrelated enough to pass appellate scrutiny. 2. The Thornburg decision In Thornburg, the North Carolina Court of Appeals devoted a significant portion of its opinion to the "pattern" issue. However, much of the relevant analysis is nothing more than a recapitulation of 75D-3(c), which is the statute defining "[p]attern of racketeering activity." The Thornburg Court observed that [t]he General Assembly... did not intend for the RICO statute to apply to isolated or unrelated episodes of unlawful activity." Id. at 565, 421 S.E.2d at 377. Then the Court refined this statement by essentially restating it, through a verbatim quote of 75D-3. In other words, the Court defined the pattern statute by paraphrasing the pattern statute. Perhaps the Thornburg decision can be defined by the manner in which it affirmed the lower court's approval of a RICO forfeiture action against the defendant. In the second to last paragraph of its decision, the Thornburg Court stated: The trial court found and we agree that the defendant engaged in at least two incidents of racketeering activity that had the same or similar purposes and methods of commission; that these incidents were not isolated or unrelated; that they occurred after October 1, 1986; and that at least one incident occurred within a four year period of the other. Thus, two of defendant's gambling convictions alone would constitute a "pattern of racketeering activity" under [the civil RICO] Act. 2 2 The Thornburg defendant had been found guilty in criminal court on five counts of various gambling offenses. Such offenses are listed in 18 U.S.C. 1961(1); and as such, these violations are considered predicate acts under N.C. Gen. Stat. 75D-(c)(2). 5

6 Thornburg, 107 N.C.App. at 565, 421 S.E.2d at 378 (emphasis added). From this statement, we can make some observations about what the Thornburg Court considered a "pattern of racketeering activity" (at least in this instance). First, the Court went out of its way to note that "two of defendant's convictions alone would constitute a 'pattern'...." Id. Knowing, as we do, that each predicate act involved in the Thornburg decision revolved around illegal gambling, the case seems to intimate that similarities between predicate acts lessens the number of acts needed to form a pattern. Such an approach is supported by the federal case law, as shown by this comment from the United States Supreme Court in H.J. Inc., 492 U.S. at , 109 S.Ct. 2893, : [C]riminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are related by distinguishing characteristics and are not isolated events.... * * * What a plaintiff... must prove is continuity of racketeering activity, or its threat, simpliciter. * * * [T]he threat of continuity may be established by showing that the predicate acts are part of an ongoing entity's regular way of doing business... [or] where it is shown that the predicates are a regular way of conducting defendant's ongoing legitimate business (in the sense that it is not a business that exists for criminal purposes).... (Emphasis added.) Thus, the Thornburg decision, intentionally or not, appears to track the (still ill-defined) logic of H.J. Inc. In Thornburg, the RICO defendant utilized his business as a vehicle, over an unstated period of time, for illegal gambling (the "enterprise"). The gambling illegalities ranged from "possess[ion] [of] gambling devices," to "possessi[on of] numbers tickets," and were oriented toward "the same or similar purpose[]" of making such activities available to the public. Thornburg, 107 N.C.App. at , 421 S.E.2d at The "methods of commission" of these predicate acts were similar, i.e., they were oriented toward gambling services, and they were "distinguishing" and "interrelated" for the same reasons. 6

7 All told, there is little guidance to be found elsewhere on what constitutes a surefire "pattern of racketeering" under either the North Carolina Act or federal RICO. In essence, the courts have resorted to "a case by case approach," under which "no mechanical test can determine the existence of a RICO pattern." American Bankers Ins. Co. v. First Union Nat'l Bank, 699 F.Supp. 1174, 1176 (E.D.N.C. 1988), aff'd 900 F.2d 249 (4th Cir. 1990). In other words, there is no clear definition of a "pattern," and the RICO practitioner is advised to proceed cautiously and to plead every predicate act possible. Otherwise, the claim may be dismissed. c. RICO Damages: Injuries to Business and Property 1. Kaplan redux In Kaplan, one of the central issues was whether the plaintiffs had demonstrated any injury "cognizable under NC RICO." Kaplan, 123 N.C.App. at 726, 475 S.E.2d at 252. The Kaplan plaintiffs claimed "loss of the use and enjoyment of their home, as a result of the [abortion protester's] appearance targeted at [their] home." Id. For statutory guidance, the Kaplan Court turned to N.C. Gen. Stat. 75D-8(c)("Available RICO civil remedies"), which reads, in pertinent part: Any innocent person who is injured or damaged in his business or property by reason of any violation of G.S. 75D-4 involving a pattern of racketeering activity shall have a cause of action for three times the actual damages sustained and reasonable attorneys fees. Id., 123 N.C.App. at 726, 475 S.E.2d at 252 (emphasis added). Similarly, federal RICO, 18 U.S.C. 1964(c) provides recovery to any person "injured in his business or property...." The Kaplan Court observed that it did not perceive [any] legally significant distinction between the languages of [N.C. Gen. Stat. 75D-8(c) and 18 U.S.C (c)]." Kaplan, 123 N.C.App. at 729 n.3, 475 S.E.2d at 254 n.3. Accordingly, the Kaplan Court turned to federal cases for its authority on RICO injuries. Id. at 727, 475 S.E.2d at The Court found that two injury limitations operate generally on all RICO claims. First, "a showing of injury requires proof of concrete loss..." and "[s]econd, it is clear that personal injuries are not compensable under RICO." Id.(quoting Oscar v. University Students Co-op. Ass'n., 965 F.2d 783, (9th Cir.), cert. denied, 506 U.S. 1020, 113 S.Ct. 655 (1992)). Based upon this injury 7

8 requirement, the Kaplan Court determined that loss of use and enjoyment of one's residence or business, because of a nuisance created by picketing and protests, was not a "concrete loss" compensable through RICO. Id. at 726, 475 S.E.2d at 252. The Kaplan Court took pains to distinguish an injury claim based upon "loss of enjoyment," from a claim based upon "damages for the diminution in value of their house." Id. Insofar as the Kaplan plaintiffs' injuries sounded in terms of "personal discomfort and annoyance," the Court observed, such damages were "not a tangible injury to property... because the market value of plaintiffs' [property] interests [had] not declined." Id. (citation and internal brackets omitted). 2. The E.F. Hutton decision The E.F. Hutton case provides further insight into the injury requirements of civil RICO, through its analysis of 18 U.S.C. 1964(c)'s "business or property" injury provision (the federal analogue to N.C. Gen. Stat. 75D-8(c)). In E.F. Hutton, the plaintiffs alleged that a national stock brokerage firm (the "brokerage firm") had illegally "churned" their accounts, causing them to suffer significant investment losses. Contemporaneous to the stock churning alleged by plaintiffs, the brokerage firm was engaged in "an enormous check-kiting scheme which had artificially inflated the market price [of the brokerage firm's] stock." E.F. Hutton, 91 N.C.App. at 162, 370 S.E.2d at 859. The E.F. Hutton plaintiffs claimed that they had relied on the brokerage firm's reputation in establishing a trading account there. Id. a. The RICO "Nexus" requirement The E.F. Hutton plaintiffs alleged that the brokerage firm's "check-kiting scheme gave rise to a pattern of racketeering which affected interstate commerce." 3 Id. The Court of Appeals disagreed, reasoning that, under 1964(c), a plaintiff must "show, and can only recover to the extent that, the injury in his business or property has been caused by the conduct constituting the violation (of 1962), or the predicate act." E.F. Hutton, 91 N.C.App. at 163, 370 S.E.2d at 860. Accordingly, the Court determined, plaintiffs could not "show that defendant's check-kiting scheme directly or indirectly 'injured' their investments.... [Thus,] [w]e see no connection between defendant's stock churning activity and the defendant's... check-kiting scheme." Id. This connection was paramount, the Court determined, because 1962(c) requires a "nexus between the racketeering activity or 3 North Carolina's Act contains no "interstate commerce" requirement, thus broadening the field of potential defendants to a state RICO claimant. 8

9 predicate act" and plaintiff's injuries. Id. at 162, 370 S.E.2d at 859 (emphasis added). This "nexus" requirement has its roots in Sedima, wherein the Court held that "the compensable [RICO] injury necessarily is the harm caused by the predicate acts sufficiently related to constitute a pattern... [a]ny recoverable damages will flow from the commission of the predicate acts." Id., 473 U.S. at 496, 105 S.Ct. at 3285 (emphasis added). Despite this straightforward language from Sedima, many federal circuits continued to insist that 1964(c) claimants prove a "racketeering injury;" that is, the RICO injury must arise from "the defendant's investment or use of the racketeering income (the 'investment use' rule) itself," not just from the predicate acts. Busby v. Crown Supply, 896 F.2d 833, 837 (1990)(citing federal cases espousing the "investment use" rule). The Fourth Circuit, through Busby, disavowed the investment rule, "[b]ecause the use or investment of funds gotten from racketeering activity is not traceable, [and as such,] no causal connection between the use or investment of illgotten cash and an injury to plaintiff is provable." Id. at 839 (citation and internal brackets omitted). Citing the above statement from Sedima, the Busby Court found no basis for a "racketeering injury" requirement. Id. Instead, RICO claimants under 1964(c) should "employ a traditional causation analysis in determining whether a RICO [injury has occurred]." Id. 896 F.2d at 839. Thus, the Busby Court, like the E.F. Hutton Court, reached the conclusion that damages in RICO flow from the predicate acts themselves, rather than from any so-called "racketeering injury." Assumably then, the E.F. Hutton RICO claimants would have prevailed if they could have demonstrated a "nexus" or causation between the illegal check-kiting and their investment in the brokerage firm. III. Damages in Summary Neither Kaplan nor E.F. Hutton are instructive enough to provide a map through the RICO damages minefield. However, these cases offer clear precedent for the following propositions: 1. N.C. Gen. Stat. 75D-8(c), which requires injury or damage to "business or property, will be read strictly. Ephemeral damages, such as "loss of enjoyment of one's home" will not surpass a motion to dismiss. 2. Damages in the nature of personal injury are not compensable under RICO. Thus, no matter how egregious the predicate acts committed by the RICO defendant, no claim will lie based on such damages. Damages need to be ascertainable and demonstrable. For instance, if you have 9

10 alleged mail fraud as a predicate act, and the fraud resulted in lost profits, or the purchase of defective machinery or the like, these injuries should suffice under the Act. 3. A RICO plaintiff need not show a "racketeering injury" in order to recover. In other words, the "investment rule" discussed explicitly by Busby and implicitly by E.F. Hutton will not apply in either a state or federal RICO action brought in state court. Because of the Kaplan Court's ruling that "no legally significant distinction [exists] between the language of [N.C. Gen. Stat. 75D-8 and 18 U.S.C. 1964(c),]" id., 123 N.C.App. at 729, 475 S.E.2d at 254, and the wholesale analogizing between the state and federal versions of RICO engaged in by our courts, the E.F. Hutton "nexus" rule will most assuredly apply. This means the RICO plaintiff must demonstrate an injury resulting from one of the predicate acts alleged in the complaint -- or a "nexus," if you will. If these items are addressed, you will have significantly reduced the risk of having your state (or federal) RICO claim dismissed due to a faulty damages theory under 75D-8. IV. Conclusion There are no guarantees with RICO -- state or federal. The statute is ambiguously drawn, disliked by the judiciary, and missteps are legion (as shown by the appellate cases). However, if a civil RICO claim can be properly alleged on a given set of facts, it will certainly apply to "legitimate" businesses and other groups. A civil RICO judgment under North Carolina law will provide the successful plaintiff with two desirable things: (1) payment of reasonable attorneys fees by the defendant, and (2) a mandatory imposition of treble damages by the Court. Because the treble damages provision of the Act is mandatory, it differs materially from its statutory kin, the unfair and deceptive trade practice provision of Chapter 75 of the General Statutes. See generally, Chastain v. Wall, 78 N.C.App. 350, 337 S.E.2d 150 (1985), cert. denied, 316 N.C. 375, 342 S.E.2d 891 (1986) (allowing the trial court to decide, as a matter of law, whether certain facts are unfair or deceptive under Chapter 75). For this reason alone, the plaintiff's bar is well advised to get acquainted with civil RICO. Although rarely used, it is an important weapon in the plaintiff's arsenal. 10