Civil RICO / Supreme Court Case
The Supreme Court of the United States in Bridge v. Phoenix Bond and Indemnity Co.128 S.Ct. 2131 (2008) ruled on an issue important to the Racketeer Influenced and Corrupt Organizations Act (RICO) and settled a dispute among the circuit courts of appeals.
The case involved whether a plaintiff in a civil RICO, based on mail fraud must rely upon the false statements of the defendant.
The Supreme Court ruled that the plaintiff does not need to rely on the false statements as long as a third party relies on the false statements.
Three circuit courts of appeal held that a victim may recover on a RICO claim based on mail fraud whether or not the victim was a direct recipient of the false statements.See Mid Atlantic Telecom Inc v. Long Distance Servs, Inc., 18 F.3d 260, (C.A.4 1994);Systems Management, Inc. v. Loiselle 303 F.3d 100 (C.A.1 2002); and Ideal Steel Supply Corp. v. Anza 373 F.3d 251, 263 (C.A.2 2004).
Two other circuits held that the plaintiff must show reliance on the defendants misrepresentations. These were the Sixth and Eleventh Circuits. See VanDenBroeck v. CommonPoint Mortgage Co. 210 F.3d 696 (C.A.6 2000) and Sikes v. Teleline, Inc.281 F.3d 1350 (C.A.11 2002).
The case stemmed from Cook County Illinois' practice of selling tax liens at public auction on property of delinquent taxpayers. Bids are submitted and in order to obtain the tax lien the bidder must agree to take the lowest penalty rate. The property owner may then redeem the property by paying the lienholder the delinquent taxes plus the penalty established at the auction and an additional 12% penalty on any taxes subsequently paid by the lienholder. If the property owner does not redeem the property within the statutory redemption period, the lienholder may obtain a tax deed for the property which results in the purchase of the property for the value of the delinquent taxes. The right to obtain such property through a tax lien was of such a benefit that many bidders would submit the lowest possible interest rate, that is 0%.
The case arose because many bidders wanting to obtain the tax liens would bid 0% and therefore there were ties for the lowest rate.
Cook County's solution to this problem was to allocate parcels on a rotating basis to ensure that the liens were apportioned fairly among the 0% bidders. In order to ensure that bidders did not submit bids through artificial or third party entities thereby increasing their opportunity to obtain the tax liens, Cook County required all bidders to submit an affidavit in compliance with the Single Simultaneous Bidder Rule. This rule required that the tax buying entity submit bids in its own name and prohibited the use of agents, employees or related entities to submit simultaneous bids on this same parcel.
In this case the defendant violated the Single Simultaneous Bidder Rule by submitting false affidavits which failed to disclose that it was bidding through various entities on the same property. The result was that the defendant obtained a larger share of the tax liens. The plaintiffs in the district court were the losing bidders. The defendant in the district court contended that the plaintiff could not recover under RICO based on mail fraud because none of the other bidders relied on the false affidavits submitted to Cook County. Since only Cook County relied on the false affidavits in distributing the tax liens, the defendant contended that the RICO suit had to be dismissed.
The defendant argued that the plaintiffs did not receive the false affidavits and therefore could not have possibly relied on any statements therein. The Circuit Court of Appeals for the Seventh Circuit reversed the district courts dismissal. The Seventh Circuit Court of Appeals reversed and the Supreme Court granted certiorari to hear the case.
In a civil RICO claim predicated on mail fraud, the Supreme Court in the case of Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006) considered a civil RICO claim predicated on mail fraud. There, the Supreme Court held that proximate causation is a condition of recovery. The Court did not however, address the issue as to whether reliance by the plaintiff was required under such a claim.
RICO provides a right of action for treble damages to any person injured in his business or property by reason of the conduct of an enterprise's affairs through acts of racketeering including conduct indictable as mail fraud. In analyzing the mail fraud statute the Court pointed out that mail fraud under 18 U.S. Code Section 1341 is broader than common law fraud and noted that an act of mail fraud by submission of a false statement or document through the mail does not require as an element, even in a civil setting, that the fraudulent mailing be submitted to the victim. The Court also discussed the case of Beck v. Prupis, 529 U.S. 494 (2000) in which a private right of action for violation of RICO conspiracy under 18 U.S. Code Section 1962(d) was considered. In Beck, the Court held that an injury caused by an overt act that is not an act of racketeering or otherwise wrongful under the RICO statute is not sufficient to state a cause of action under Section 1964(c) for a violation of the RICO conspiracy under Section 1962(d).
The Bridge decision continues, the Supreme Courts broad application of a private parties right to sue for treble damages under RICO. The Court also reiterated factors that are important to the defense of a civil RICO claim.
While the Court rejected the requirement that the plaintiff, in a civil RICO case must rely upon the false representations when suing under a mail fraud theory, the Courts decision does not abandon the requirement that the mail fraud caused the plaintiffs injury. The Court in Bridge reiterated its earlier holding in Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992) holding that the plaintiff must show the defendants violation not only was the "but for" cause of the injury, but was also the proximate cause of the injury. The Court explained the proximate cause as a flexible concept that does not lend itself to a specific black letter rule. Rather, the RICO plaintiff must establish some direct relationship between the injury and the injurious conduct alleged.
The Court in Bridge, also noted that while the defendant need not rely on the misrepresentations, someone must rely on the false representation. This requirement was met by the Cook County authorities reliance on the false affidavits.
Reliance may still be a significant issue in a civil RICO case, and may be of benefit to the defense if that reliance is not reasonable.
This firm represented a board certified neurologist who was sued by State Farm Mutual Insurance Company in Federal Court based upon a civil RICO claim under Section 1962(c) and Section 1962(d) stemming from allegations of mail fraud in claims submitted to the insurance company.
In that case, alleged false claims for medical tests were submitted to State Farm. An issue of importance to the defense was whether the reliance was reasonable in light of all the facts known by State Farm. By analyzing tens of thousands of documents, this firm was able to show that State Farm was aware of information that the tests were not considered valid by some experts and nevertheless paid the claims. This issue of reliance was a major factor in the jury finding no violation of RICO conspiracy and returning no verdict against the doctor.
While Beck at first blush is another example of the Supreme Courts broad application of civil RICO, the Court ensured that other issues such as proximate causation and reliance were reiterated. These issues still present important factors that must be considered in defending or prosecuting a civil RICO case.