Oral argument: April 14, 2008
Appealed from: United States Court of Appeals, 7th Circuit (Jan. 4, 2008)
RICO, MAIL FRAUD, RELIANCE
This case concerns a civil claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Cook County, Illinois auctions tax liens to the public. The winning bidder pays the back taxes and can then recover the amount of the delinquent taxes from the property owner, along with a penalty. If the taxpayer doesn't pay, the winning bidder gains ownership of the property on which the lien was placed. Multiple bidders often tie in the auction, so bidders must submit affidavits that they are not using agents to gain an unfair advantage through relation with other bidders. Phoenix Bond and Indemnity Company ("Phoenix") brought a RICO suit against John Bridge for mail fraud, alleging that he submitted false affidavits which stated that it was unrelated to other bidders. The District Court dismissed the suit, stating that Phoenix was not the party that relied on the fraudulent mailings and therefore lacked standing to sue Bridge. The Court of Appeals reversed. The Supreme Court's decision in this case will determine whether only those parties who were the target of a fraudulent communication can bring a civil suit seeking damages under RICO.
Whether reliance is a required element of a RICO claim predicated on mail fraud and, if it is, whether that reliance must be by the plaintiff.
In a civil suit brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), does the victim have to rely on the fraudulent mailing when considering its actions? If so, does that person have to be the person who brings the lawsuit, or can another person harmed by the same fraud bring a suit?
The Treasury Office in Cook County, Illinois conducts an annual auction in which the tax liens of property owners who fail to pay real estate taxes are sold to the public. Brief for Petitioner 3. The buyer of the lien must pay Cook County for any delinquent tax and any outstanding interest on the property. Id. The property owner against whom the lien was originally placed can then redeem the lien by paying tax, interest, and a predetermined penalty. Id. at 4. If the property owner does not do so, the buyer of the lien can gain title to the property. Id.
Bidders for these liens bid the predetermined penalty between 0% and 18% that they are willing to charge the property owner. The bidder who bids the lowest penalty rate is the winner. Brief for Petitioner 4. These tax sales are competitive and a penalty rate of 0% is common. A 0% penalty rate results in buyers not realizing a profit if property owners redeem the tax liens on time. Brief for Petitioner 6. The Treasurer determines the winner in the case of multiple bids at the lowest rate. Id. at 4. In Phoenix Bond & Indemnity Co. v. Bridge, 477 F.3d 928 (2007), the Court of Appeals explains the County's system for handling the problem of multiple bids at 0% through allocation by lot. If individual A bids 0% on ten liens, and each lien attracts five total bids at the 0% penalty rate, then the County awards individual A two of the ten liens. Id. The winners share according to the ratio of their bids to the other bids that are identical, incentivizing multiple bids per lien directly or through agents of a bidder. Id. However, if individual B submits two bids per lien, then B will take double the liens that the A took. To prevent this, the County created the "Single, Simultaneous Bidder Rule" ("SSB rule") barring related entities from bidding on a particular lien simultaneously. Id.
On July 15, 2005, Phoenix Bond & Indemnity Co. and BCS Services, Inc. sued Sabre Group, LLC's registered tax bidder John Bridge and more than 20 others in the United States District Court for the Northern District of Illinois, stating that Bridge and the others conspired and participated in racketeering activity in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Brief for Petitioner 7-8. Racketeering refers to illegal business and is usually used in the context of organized crime. RICO is a federal act that provides criminal penalties and civil claims for certain acts performed as part of a criminal organization. Phoenix accused Bridge of mail fraud based on an alleged scheme that used certain mailings and of violating the SSB rule. Id. at 8. As presented in Phoenix Bond & Indemnity Co. v. Bridge, 477 F.3d 928 (2007), the scheme that Phoenix alleged is that Bridge regularly arranged for other firms related to Bridge to bid on his behalf constituting fraud; Bridge mailed certain affidavits and certain notices to owners, constituting mail fraud.
In Phoenix Bond & Indemnity, Co. v. Bridge, WL 3527232 (2005), the District Court dismissed Phoenix's claim, stating that Phoenix lacked standing to bring the suit because it was not the party that relied on the fraudulent mailings. The Court of Appeals for the Seventh Circuit reversed. Brief for Petitioner at 9. In Phoenix Bond & Indemnity Co. v. Bridge, 477 F.3d 928 (2007), the Court of Appeals acknowledged that there is a split in federal courts regarding this issue and found along with the majority. The Supreme Court granted certiorari.
According to the Organized Crime and Racketeering section of the Department of Justice website, Congress passed the Racketeer Influenced and Corrupt Organizations Act ("RICO") in 1970 with the intention of combating organized crime. RICO makes certain conduct criminal as well as providing for private rights of actions against individuals committing racketeering activity. Some argue that RICO has been extended beyond its original purpose and is "misused against businesses and other organizations because of the statute's treble damages provision." Brief of Amicus Curiae McKesson Corporation at 2. Others, such as the Department of Justice believe that RICO civil claims are powerful weapons that may be used to curtail wrongs committed by collective entities ranging from corporations to labor unions. See Civil RICO: A Manual for Federal Attorneys at 16, October, 2007.
Bridge argues that in order to bring a civil RICO claim based on mail fraud, a plaintiff must show that the plaintiff relied on a misrepresentation that the defendant made to the plaintiff. Brief for Petitioner 16. This argument based on the idea that interpretation of the statute should be grounded in the common law understanding of fraud, which requires the element of reliance. Brief for Petitioner 20. Phoenix refuses to draw common law principles into the discussion of statutory interpretation and instead chooses to look to the plain language of the RICO Act, which does not contain a reliance element. Brief for Respondent 21.
Bridge and Phoenix also differ on whether or not plaintiff reliance on the misrepresentations of the defendant is necessary to satisfy the proximate cause element of a civil RICO claim based on mail fraud. Bridge argues that plaintiff reliance is necessary, because without reliance, it cannot be said that the misrepresentation caused any damage suffered by the victim. Brief for Petitioner 25. Phoenix argues that plaintiff reliance is not necessary in order to establish such causation. Brief for Respondent 24.
Among the potential ramifications of expanding RICO's already substantial reach is the continued use of its civil claims to sue business executives. See Megan Barnett, RICO: Law of Unintended Consequences, Portfolio (Oct 29, 2007). While only a few RICO criminal claims are argued each year, business leaders decry the civil claims of the statute as opening the floodgates to torrents of litigation that treat corporate executives as organized crime bosses. Id. RICO claims are both costly and difficult to defend with potentially exorbitant damages. Id. RICO, in fact, provides treble damages (i.e., damages worth three times the harm actually suffered) for successful plaintiffs. In the current case before the Supreme Court, allowing plaintiffs who have not show reliance to bring suit would throw open the class of individuals who would be able to file RICO suits, and therefore provide a tremendous influx of work for plaintiffs' attorneys.
Phoenix questions the credibility of arguments such as these "about a flood of RICO claims," claiming that RICO claims have not, in fact, increased in recent years and remain a small percentage of the civil docket in federal courts. Brief for Respondent 41. According to Phoenix, there is no evidence that there are more RICO claims the Circuits that have rejected Bridge's argument than in those that have not decided the issue, or that there has been an increase in RICO claims. Id. at 43.
Phoenix Bond & Indemnity, Co. and BCS Services, Inc. (collectively "Phoenix") filed a complaint under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. §§ 1961-1968, against John Bridge, the Sabre Group, LLC, and its principal Barrett Rochman (collectively "Bridge") for violating the SSB Rule in Cook County. Mail fraud is defined as a racketeering activity under RICO § 1961. See 18 U.S.C.A. § 1961(B). Because the sale of tax liens in Cook County employs the mail, any fraud that affects the bidding process qualifies as mail fraud. See 477 F.3d 928 at 930. Based on allegations of mail fraud, Phoenix filed a civil suit against Bridge under RICO § 1964 to recover pecuniary losses sustained as a result of Bridge's violations of the SSB Rule. See id.
Although the United States District Court, N.D. Illinois, Eastern Division dismissed the complaint for lack of standing under Federal Rule of Civil Procedure 12(b)(1), The United States Court of Appeals, Seventh Circuit held that Phoenix had standing in this suit because it suffered an injury in fact and that injury can be redressed by an award for damages. See id. In addition to injury in fact, United States Supreme Court precedent requires the plaintiff to establish that the defendant's fraudulent scheme was the proximate cause of its injury for a successful claim under RICO. See id. In Holmes v. SIPC, 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), the Court acknowledged that determining the existence of proximate cause required asking a set of questions to determine whether the plaintiff was remotely or directly injured by the defendant's fraud. See id. An injury is considered too remote to support a cause of action under RICO if someone else would be distinctly better at enforcing the law, the presence of intermediate parties would make damages too difficult to calculate, or recovery by the plaintiff would be at the expense of someone else with a better claim. See id.
The court of appeals determined that in this case the plaintiffs, as the losing bidders, were the only victims of defendant's fraudulent scheme. See id. at 931. Regardless of which bidder wins the auction, Cook County is always paid the full amount of back taxes it is owed and the property owner has no interest in who holds the tax lien as long as the bidding process results in a 0% penalty. See id. According to the court of appeals, as the only victims of Bridge's fraudulent scheme, Phoenix suffered an immediate injury and the Court's proximate causation requirement was satisfied. See id. at 932.
Bridge argued to the court of appeals that this RICO action should be dismissed even if Phoenix did suffer a direct injury because they were not the actual recipient of any false statements and did not fall within the zone of interests protected by the mail fraud statute. See id. The court of appeals recognized a split of opinion among the circuit courts before joining what it recognized as the majority. See id. The court of appeals held that the direct victim of false statements can recover under RICO even when they were not the direct recipient of those statements. See id. The Court will resolve this difference of opinion by answering the question of whether reliance is a required element for a RICO claim predicated on mail fraud, and if so, whether that reliance must be by the plaintiff.
RICO and Mail Fraud
Under 18 U.S.C. § 1964(c), anyone who is injured in his business or property by an act that qualifies as a RICO violation is permitted to bring suit in any federal district court and may recover three times the damages sustained as well as the cost of the suit including reasonable attorney's fees. See 18 U.S.C. § 1964(c). Under RICO § 1962(a) it is unlawful for any person to receive income directly or indirectly from a pattern of racketeering activity. See 18 U.S.C. § 1962(a). According to § 1961(1)(B), any act indictable under the mail fraud statute, 18 U.S.C. § 1341, qualifies as a racketeering activity under RICO. See 18 U.S.C. § 1961(1)(B). The mail fraud statute is a very broad criminal statute requiring only that a scheme to profit by means of fraudulent pretenses makes use of the Postal Service, or any private or commercial carrier, for the purpose of carrying out that scheme. See 18 U.S.C. § 1341.
Bridge argues that although criminal mail fraud qualifies as a predicate act for a criminal RICO claim, it is not sufficient to support a civil RICO claim. See Brief for Petitioner at 17. Bridge further states that because this is a civil, rather than criminal, RICO claim it is necessary to look to the common law meaning of fraud in order to properly interpret the relevant language of the RICO statutes. See id. at 17-18. The argument follows that this is not just a matter of whether the activity in question qualifies as a predicate act under the mail fraud statute, but what constitutes a civil cause of action under RICO. See id. at 21. Thus, this inquiry requires interpreting § 1341, the mail fraud statute, in conjunction with § 1964(c), the provision for civil remedies under RICO. See id. In order to understand the combined meaning of these statutes, according to Bridge, it is necessary to look to the common law meaning of fraud at the time the RICO statutes were enacted. See id. at 21. Bridge asserts that this should be the standard the Court uses to determine whether or not RICO requires a showing of reliance by any plaintiff attempting to assert a civil RICO claim based on mail fraud. See id. at 21-22.
Phoenix takes the position that RICO is a federal law triggered by the commission of a limited number of defined predicate acts and is not subject to interpretation according to common law principles. See Brief for Respondent at 17. This is in contrast to Bridge's position, which distinguishes the mail fraud statute and criminal RICO actions from civil RICO claims. See Brief for Petitioner at 17-18. While Bridge believes that civil RICO actions should adhere to common law definitions, Phoenix disagrees, denying that the elements of a RICO claim are transmuted when that claim is brought as a civil, as opposed to criminal, action. See Brief for Respondent at 20. According to Phoenix, Congress' use of the term "indictable" to define the predicate acts that trigger RICO under § 1961(1)(B), clearly indicates an intention that the criminal law definition should govern, and any additional elements taken from the common law should not apply. See id. at 21. The argument continues that the predicate acts listed as violations of RICO under § 1961(B)(1) are meant to be taken as they are written and do not change whether the RICO action is civil or criminal in nature. See id. at 20.
Bridge's position is that common law principles should govern civil RICO claims, and under the common law definition of fraud first-person reliance by the plaintiff is required. See Brief for Petitioner at 22-23. The argument continues that because reliance was a well-established common law principle of fraud long before RICO was enacted, Court precedent requires reliance as an element of a civil RICO claim based on the predicate offense of mail fraud. See id. at 24. By this reasoning, the proximate cause requirement established through the "by reason of" language in § 1964(c) also indicates that reliance is a necessary element for a civil RICO claim. See id. at 25. Phoenix recognizes that reliance is an element of proximate cause, but maintains that it is not an independent element of a RICO claim. See Brief for Respondent at 22. In order to establish a cause of action under RICO, someone will generally have to be shown to have relied upon the predicate act of fraud. See id. at 24-25. According to Phoenix, proximate cause does not require reliance by the plaintiff as Bridge suggests. See id. at 25. In this case the County's reliance on Bridge's fraudulent misrepresentations, and the injury Phoenix suffered as a direct result, are sufficient to satisfy RICO's proximate cause requirement. See id. Phoenix points out that plaintiff reliance is not required in all cases involving common law fraud and that relief is often granted based on direct injury rather than reliance. See id. at 26.
Bridge cites the Court's decision in Holmes for the proposition that common law principles should govern the determination of whether proximate cause exists between the claimed injury and the RICO violation. See Brief for Petitioner at 25-26. Phoenix, on the other hand, reads the Court's decision in Holmes as holding that there is no basis in common law for imposing a black letter rule that requires plaintiff reliance in the context of a civil RICO claim predicated on fraud. See Brief for Respondent at 33. Bridge states that the common law dealing with causation is the obvious source for guidance in determining whether proximate cause requires reliance on the part of the plaintiff in the context of a civil RICO claim based on mail fraud. See Brief for Petitioner at 28. Bridge asserts that under the well-settled common law principles found in the Restatement (Second) of Torts, causation as an element of common law fraud requires reliance by the recipient on the misrepresentation in deciding either to take some action or refrain from it. See id. For Bridge, it necessarily follows that for a civil RICO claim predicated on mail fraud the plaintiff must be able to establish that his injuries resulted from his reliance on the defendant's fraudulent misrepresentation. See id. Phoenix agrees that the recipient of a misrepresentation must show reliance to support a claim of fraud, but the Restatement contains no indication that fraud can only be perpetrated against the recipient of a misrepresentation. See Brief for Respondent at 33. Further, Phoenix finds that the comments to the Restatement explicitly recognize the existence of liability for an intentional injury to a third person. See id. at 31. According to Phoenix, there is no justification for imposing an artificial limitation, supposedly drawn from the common law, that proximate cause may exist only where A lies to B and B justifiably relies on the falsehood to its detriment. See id. at 32. Phoenix argues that the common law also recognizes an action where A lies to B and B justifiably relies on the falsehood to the direct detriment of C. See id.
Bridge recognizes the split of opinion among the federal circuits, but claims the majority agree that reliance is a required element for civil RICO claims predicated on mail fraud. See Brief for Petitioner at 29. According to Phoenix, the cases cited by Bridge to support this finding of a favorable majority all involve frauds perpetrated on the recipient of the false statements. See Brief for Respondent at 42. In cases where the plaintiff is the direct victim of the fraudulent scheme rather than the recipient, Phoenix found the courts to be virtually unanimous in holding that third party reliance is sufficient to state a civil RICO claim predicated on fraud. See id. at 42.
According to Bridge, public policy supports the reliance requirement as a limitation on the availability of civil RICO claims. See Brief for Petitioner at 37-38. RICO's civil cause of action provision was not intended to expand federal jurisdiction into areas properly belonging within the realm of state law. See id. at 37. Bridge takes note of former Chief Justice Rehnquist's concern that with the growth of long distance communication and technology, the mail and wire fraud statutes had developed a much a much wider sweep than when the RICO statutes were enacted. See id. at 38. Civil RICO actions, unlike criminal RICO actions, are not limited by prosecutorial discretion. See id. A required element of reliance would serve as a limitation on civil RICO liability. See id. at 39. The purpose of reliance is to ensure that, as a predicate for liability, a causal connection exists between the plaintiff's injury and the defendant's misrepresentation. See id. Phoenix argues that policy concerns cannot justify a first-party reliance restriction on civil RICO claims. See Brief for Respondent at 41.
Application of the proximate cause analysis established by the Court in Holmes and Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006) is already sufficient to ensure that any civil RICO claims based on truly indirect frauds are eliminated. See id. at 43. There is no evidence that civil RICO claims are more prevalent in circuits where third-party reliance is recognized as a cause of action. See id. According to Phoenix, Bridge is essentially asking the Court to override a policy set by Congress with one of its own and Congressional enactments may not be contravened for the sake of policy considerations. See id. at 48. In the past, Congress has not hesitated to alter RICO or its predicate acts when it determined that alterations were required by policy considerations. See id. at 49.
This case addresses whether or not reliance is necessary in a RICO claim based on mail fraud and, if so, whether that reliance must be by the plaintiff. A finding for Bridge will benefit corporate executives seeking to curtail what they consider to be a powerful and far-reaching statute that has been over-extended and used far beyond its original purpose of curbing organized crime. Conversely, a finding for Phoenix will to some extent likely result in the possibility of an increased number of plaintiffs eligible to bring mail fraud claims. At any rate, the case has important and far-reaching implications for the business world.
Edited by: Richard Beaulieu