Filed: Feb. 13, 1995
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 2-13-1995 Tabas v Tabas Precedential or Non-Precedential: Docket 92-1495 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Tabas v Tabas" (1995). 1995 Decisions. Paper 42. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/42 This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for t
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 2-13-1995 Tabas v Tabas Precedential or Non-Precedential: Docket 92-1495 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "Tabas v Tabas" (1995). 1995 Decisions. Paper 42. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/42 This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for th..
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Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
2-13-1995
Tabas v Tabas
Precedential or Non-Precedential:
Docket 92-1495
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"Tabas v Tabas" (1995). 1995 Decisions. Paper 42.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/42
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 92-1495; 92-1529
HARRIETTE S. TABAS; RICHARD S. TABAS;
NANCY C. TABAS; GERALD LEVINSON,
As Executors of the Estate of CHARLES L. TABAS
Appellants
v.
DANIEL M. TABAS; JOSEPH P. CAMPBELL;
JAMES J. MCSWIGGAN; LEE A. TABAS; ROBERT TABAS;
SUSAN TABAS TEPPER; LINDA TABAS STEMPEL;
JOANNE TABAS WURZAK; CAROL TABAS STOFMAN; HOWARD WURZAK
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 91-01355)
Argued: January 26, 1993
Before: GREENBERG, ROTH and LEWIS,
Circuit Judges
Reargued In Banc October 18, 1994
Before: SLOVITER, Chief Judge, BECKER, STAPLETON,
MANSMANN, GREENBERG, HUTCHINSON, SCIRICA, COWEN,
NYGAARD, ALITO, LEWIS, ROTH, MCKEE,
Circuit Judges
(Opinion Filed February 13, 1995)
Richard A. Sprague, Esquire (Argued)
Daniel L. Lemisch, Esquire
Denise Pallante, Esquire
Sprague & Sprague
135 South 19th Street
Wellington Building, Suite 400
Philadelphia, PA 19103
Howard K. Goldstein, Esquire
Astor, Weiss, Kaplan & Rosenblum
Broad Street at Walnut
The Bellevue, Sixth Floor
Philadelphia, PA 19102
Attorneys for Appellants
Harold E. Kohn, Esquire
Robert J. LaRocca, Esquire
Joanne Zack, Esquire (Argued)
Kohn, Nast & Graf, P.C.
1101 Market Street, 24th Floor
Philadelphia, PA 19107
Attorneys for Appellees
OPINION OF THE COURT
ROTH, Circuit Judge:
In this action, brought under the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), Pub. L. 91-452, Title IX,
84 Stat. 941, as amended, 18 U.S.C. §§ 1961-1968, we are
presented with the question whether defendants' acts, as alleged,
constituted a "pattern of racketeering activity." Specifically,
we must determine what showing is required for plaintiffs to meet
the "continuity" prong of RICO's "pattern" requirement. Because
we find that plaintiffs have alleged a series of acts sufficient
to satisfy RICO's continuity requirement, we will reverse the
district court's grant of summary judgment and remand this case
for further proceedings consistent with this opinion.
The plaintiffs are four of the executors of the Estate
of Charles Tabas ("the Estate"): Charles's widow, Harriette
Tabas; Richard Tabas and Nancy Tabas, two of Charles and
Harriette's children; and Gerald Levinson, one of Charles's
business associates.1 In addition to Daniel Tabas, who is
President and Chief Executive Officer of Tabas Enterprises, the
named defendants include Joseph Campbell, the Executive Vice
President of Tabas Enterprises; James McSwiggan, the Comptroller
of Tabas Enterprises; Daniel's children; and one of Daniel's
sons-in-law.
I.
A.
In 1964, brothers Charles and Daniel Tabas formed a
partnership, Tabas Enterprises, to conduct real estate and other
business ventures. The partnership agreement governing the
brothers' joint property holdings required that, in the event of
the death of either partner, the surviving partner would
distribute partnership income equally to himself and to the
estate of the deceased partner, regardless of any personal
1There are six heirs to the Estate, including the Charles L.
Tabas Foundation.
services either brother might render. See Appendix ("App.") at
62 (Partnership Agreement ¶ 3). The partnership agreement also
provided that:
It is the intent of the parties that the survivor of
them shall be free to exercise his judgment for the
joint benefit of ownership . . . provided always, that
the responsibility and obligation of the survivor to
the estate of the deceased shall be that required of a
fiduciary.
App. at 62 (Partnership Agreement ¶ 4(b)).
In 1983, Charles Tabas died. Soon after Charles's
death, John Van Der Wal, a financial advisor to Daniel and to
Tabas Enterprises, was asked by Daniel to recommend a reasonable
financial arrangement between Daniel and Charles's widow,
Harriette. In response, Van Der Wal sent a letter to Harriette
in which he recommended that Daniel receive a $180,000 annual
management fee from Tabas Enterprises, prior to profit sharing by
the partners. Van Der Wal further recommended that Harriette and
Daniel each receive a $10,000 monthly draw check from Tabas
Enterprises.2
Beginning in March 1983, monthly distribution checks of
$10,000 were drawn on a Tabas Enterprises account and sent to
Harriette through the United States mail. Daniel was also
provided with a $10,000 monthly draw. In addition, from March
2
Prior to Charles's death, each brother received a monthly
disbursement of $10,000 from Tabas Enterprises. In addition, the
brothers appeared to have an arrangement under which Tabas
Enterprises paid for many personal and business expenses.
1983 to September 1986, Tabas Enterprises paid for various
personal expenses incurred by Harriette and Daniel.
In September 1986, Tabas Enterprises stopped paying
Harriette's personal expenses and also eliminated Harriette's
$10,000 monthly draw. Instead, Tabas Enterprises began paying a
$15,000 monthly draw to the Estate. At the same time, Daniel's
monthly draw was increased to $15,000. Tabas Enterprises
continued to pay Daniel management fees and to cover his personal
expenses.3
Shortly thereafter, the Estate brought suit against
Daniel and others in the Montgomery County, Pennsylvania, Court
of Common Pleas. The complaint alleged, inter alia, that the
Estate was not being allocated an equal share of the partnership
income, that Daniel used Tabas Enterprises funds for personal
purposes, that Daniel misled the Estate by directing the
preparation of false and misleading financial statements, and
that Daniel had breached his fiduciary duties to the Estate.
3
The parties dispute whether plaintiffs were aware that
Daniel was receiving substantial compensation from Tabas
Enterprises in addition to his monthly draw check. Defendants
argue that, soon after Charles's death, plaintiffs knew of
Daniel's compensation and therefore could not have been deceived
by the monthly checks which served as the basis of the mail fraud
predicate acts. Plaintiffs acknowledge that they believed Daniel
was taking more than he was entitled to under the partnership
agreement; this was partly the basis for the 1986 state suit.
They contend, however, that they did not know the extent to which
they were being short-changed until Price Waterhouse was given
access to Tabas Enterprises' records. Consequently, plaintiffs
assert that they initiated this suit as soon as they discovered
the extent of the alleged fraudulent activity.
On November 20, 1987, the parties settled the state
suit and agreed that the assets of Tabas Enterprises would be
sold. The settlement agreement established a schedule and method
for liquidating the majority of the jointly held properties.4 In
conjunction with the liquidation of the joint assets, the
settlement agreement provided that "the Estate shall be given
complete access to all properties, books and records in
connection therewith[.]" App. at 67 (Settlement Agreement at ¶
4(a)(i)). The settlement agreement did not address the
distribution of income earned after November 20, 1987, but did
provide that:
To the extent that the Partnership Agreement dated
March 12, 1964 is not inconsistent with the provisions
of this [Settlement] Agreement, the Partnership
Agreement shall continue in full force and effect until
the liquidation and auction [of Tabas Enterprises'
assets] are completed.
App. at 70 (Settlement Agreement ¶ 13). Another provision of the
settlement agreement provided that the parties would agree to
execute a mutual general release:
4
The settlement agreement also provided that Daniel would
purchase the Estate's interest in Acorn Iron and Supply Company
and $1.5 million in Royal Bank stock. In addition, the Estate's
interest in property on City Line Avenue was transferred to
Daniel, apparently in exchange for monies from Tabas Enterprises.
Defendants, pointing to the $16.9 million that the Estate has
received pursuant to the settlement agreement and liquidation of
Tabas Enterprises, assert that plaintiffs have been treated
equally. While plaintiffs do not appear to dispute the amount
the Estate has received, they do assert that it has not received
an equal one-half of the income as required under the partnership
agreement.
requiring the dismissal with prejudice of all parties
in all litigation between or among Daniel, on the one
hand, and the Estate or any of its executors, on the
other hand, and excluding only the terms and conditions
contained herein.
App. at 69 (Settlement Agreement ¶ 9).
Lastly, the Honorable William H. Yohn, Jr.,5 was named
to act as the arbitrator of any future disputes arising from the
implementation of the settlement agreement that could not be
resolved by the parties' legal representatives. The settlement
agreement specifically provided that Judge Yohn's decisions on
such matters "shall be final, binding, and non-appealable." App.
at 70 (Settlement Agreement ¶ 12).
On May 15, 1990, Daniel and the Estate executed the
mutual general release, which provided that, except for the
obligations of the parties under the settlement agreement, the
parties would release and forever discharge one another from:
any and all actions, causes of action, demands,
judgments, contracts, debts, dues, accounts, bonds,
covenants, contracts, suits, claims, and demands of any
nature whatsoever, whether in law, equity, arbitration
or otherwise, whether know [sic] or unknown at the
present time, which [either party] ever had, now has,
hereinafter can, shall or may have, by reason of any
matter, cause or thing whatsoever, from the beginning
of the world to November 20, 1987.
App. at 293 (emphasis added).
5
At that time, Judge Yohn sat on the Pennsylvania Court of
Common Pleas. He is now a United States District Judge for the
Eastern District of Pennsylvania.
Despite the settlement agreement, plaintiffs remained
dissatisfied with Daniel's compliance with the partnership
agreement. On July 25, 1990, Judge Yohn held a hearing to
consider whether the settlement agreement barred the Estate from
asserting claims for breach of the partnership agreement stemming
from Daniel's management of Tabas Enterprises subsequent to
November 20, 1987. Finding that "[t]he provision of the
partnership agreement of March 12, 1964 concerning distribution
of income is not inconsistent with the provisions of the
settlement agreement . . . as the settlement agreement contains
no provisions concerning the distribution of income after
November 20, 1987," Judge Yohn held that the Estate could "pursue
any claims" against Daniel arising from the distribution of Tabas
Enterprises' income after November 20, 1987. App. at 1187
(Arbitration Award No. 8).6
Following this decision, Daniel's counsel requested
that Judge Yohn mediate the issues raised by plaintiffs' proposed
RICO complaint. Judge Yohn held two conferences with counsel to
discuss, among other topics, the proposed RICO claims. During
oral argument on February 1, 1991, Daniel's counsel asserted
that, because plaintiffs' proposed RICO complaint sought damages
6
These rulings were premised upon Judge Yohn's finding that:
"By agreement of the parties and with the concurrence of the
arbitrator, the arbitrator has jurisdiction to rule upon the
issue of whether the Estate may make claims against Daniel M.
Tabas concerning his management of Tabas Enterprises subsequent
to November 20, 1987." App. at 1185.
against defendants not named in the settlement agreement, the
proposed RICO complaint was outside the scope of arbitration and
therefore could not be decided by Judge Yohn in his role as
arbitrator. Nevertheless, Daniel's counsel expressed interest in
having Judge Yohn serve as a mediator in an attempt to resolve
the claims set forth in the proposed RICO complaint.
On February 20, 1991, Judge Yohn formally denied
Daniel's request to mediate the dispute. Instead, Judge Yohn
ordered that: "By agreement of the parties, and with the
concurrence of the undersigned, the proposed 'RICO Complaint' may
be filed in the United States District Court for the Eastern
District of Pennsylvania and the issues raised therein will not
be the subject of this procedure under the [Settlement] Agreement
of November 20, 1987." App. at 1282 (Arbitration Award No. 10).
Soon thereafter, plaintiffs brought the instant action,
alleging violations of RICO §§ 1962(a), (b), (c), and (d), as
well as several state law claims stemming from defendants'
handling and distribution of Tabas Enterprises assets. The
initial complaint was filed on March 4, 1991. The amended
complaint was filed on May 20, 1991.7
7
On May 29, 1991, the district court entered a scheduling
order. This schedule provided, inter alia, that discovery be
completed by December 2, 1991. The schedule also provided that
defendants' motion for summary judgment had to be filed on or
before October 21, 1991, and that plaintiffs' response was due by
November 4, 1991. Because this schedule required plaintiffs to
respond prior to the completion of discovery, and because the
parties had further disagreements about discovery, the factual
record is not fully developed. Nonetheless, the record is
Plaintiffs have appealed the district court's grant of
defendants' motion for summary judgment. On appeal, we are
required to base our review of the district court's decision on
the evidence of record. Accordingly, before we turn to the
merits of the parties' assertions, we will summarize the record
submitted to this court.
Most significantly, the record contains two financial
reports by Price Waterhouse, analyzing Tabas Enterprises'
financial and operational records. Plaintiffs' counsel retained
Price Waterhouse to determine whether these records reflected the
equal distribution of income to the Estate as required under ¶ 3
of the partnership agreement.
The first Price Waterhouse report analyzed Tabas
Enterprises' financial records dating from Charles's death in
1983 through early 1990, focusing on the period after November
20, 1987. Then, in late 1991, after the amended complaint was
filed, Price Waterhouse completed a supplemental report,
analyzing Tabas Enterprises' records from October 1989 through
July 1991. In total, the Price Waterhouse reports documented
more than three and one-half years of activity subsequent to the
November 1987 settlement agreement. In both reports, Price
Waterhouse concluded that "the books and records of Tabas
sufficient to support our conclusion that the requisites for RICO
continuity have been met.
Enterprises do not reflect the equal distribution of income," and
that "indications of fraud exist."8 App. at 352, 460-61.
The Price Waterhouse reports revealed a continuing
series of transactions to divert Tabas Enterprises' income for
the personal use of Daniel and his family, through direct
monetary benefits as well as other types of benefits. In its
first report, for instance, Price Waterhouse itemized a
substantial number of items, purchased with Tabas Enterprises'
income, for which there was no adequate documentation or
explanation substantiating an ordinary and necessary business
purpose for the expense. The report noted that, to the extent
that Daniel purchased these items using Tabas Enterprises'
income, such expenses "would inappropriately reduce the Estate's
interest in Tabas Enterprises by reducing income available for
distribution to the Estate." App. at 354. According to the
Price Waterhouse report, these purchases included personal
apparel, homeowner's dues for Daniel's vacation home in Vermont,
meals and other purchases in cities where Daniel had vacation
homes, meals and other purchases in ten foreign countries,
8
Price Waterhouse noted that its formal "opinion" was subject
to scope limitations as discussed within each report. Our review
of these limitations indicates that most were caused by Tabas
Enterprises' failure to cooperate with the Price Waterhouse
auditors. In addition, Price Waterhouse described Tabas
Enterprises' major records depository as in a "state of
disarray." In considering these reports, we will weigh the
effect of the scope limitations in light of our conclusion that
most limitations to the analysis were a result of Tabas
Enterprises' efforts to hinder the Price Waterhouse audits.
prescription medicine, and a pool heater installed at Daniel's
home in Pennsylvania. The total cost of these and other similar
expenses was approximated at $140,000.
Other problem areas cited in the first report were
Tabas Enterprises' payment of $67,000 in compensation for the
provision of home services, such as maid, gardening, and handyman
services, for Daniel and his family; the assignment of 24
automobiles owned by Tabas Enterprises to Daniel and his family,
including family members who were not employed by Tabas
Enterprises; Tabas Enterprises' payment of the automobile
insurance, repairs and maintenance, gasoline,9 car phones, auto
club membership, registration fees, tags, and title fees for all
24 cars; Tabas Enterprises' payment of telephone bills for
Daniel's primary and vacation residences; and Tabas Enterprises'
payment of insurance coverage for non-partnership assets,
including Daniel's six antique automobiles.
Price Waterhouse's second report noted that, between
the completion of the first and second reports, Daniel had
reimbursed Tabas Enterprises for only a small portion of these
expenses.10 The second report also noted that many of the
9
The report found these gasoline charges, in excess of
$18,000, especially problematic, since the relevant documents
revealed routine submissions of multiple requests for
reimbursement arising from a single receipt.
10
In his deposition, Daniel testified that all unreimbursed
expenses represented legitimate business expenses. For most of
these expenses, however, Daniel could not provide any specific
recollection of the business purpose involved.
questionable expenses detailed in the first report continued to
occur. For instance, the second report identified an additional
$78,000 in payments for personal services and an additional
$35,000 in phone bills for Daniel's private residences and mobile
telephones. The second report also noted that Daniel and his
family continued to charge personal items to Tabas Enterprises,
including personal apparel, homeowner's dues for his vacation
home in Vermont, and meals.
In addition to investigating nonmonetary benefits, the
Price Waterhouse reports also examined the direct monetary
benefits received by Daniel and his family from Tabas
Enterprises. The reports found that between November 1987 and
November 1989, Daniel received $1,502,000 in salary partnership
distributions, management fees and incentives, gratuities, and
bonuses from Tabas Enterprises, and that for the period between
November 1989 and June 1991, he received $1,166,000. The reports
also found that, during this period, in which Daniel was paid a
total of $2,668,000, the Estate received partnership
distributions totalling $660,000.11
According to the Price Waterhouse reports, the monetary
payments to Daniel's family during this time also eclipsed those
11
Price Waterhouse also noted that, in addition to his Tabas
Enterprises income, Daniel received compensation as Chairman of
the Board of Royal Bank. At his deposition, Daniel testified
that he worked 60-70 hours per week for Tabas Enterprises, app.
at 1683, and that his Royal Bank time commitment consisted of
Thursday morning executive staff meetings and a board meeting one
evening each month. App. at 614.
received by the Estate. The reports documented that between
November 1987 and June 1991, Daniel's family, including his six
children and one son-in-law, received $1,363,000 from Tabas
Enterprises in the form of salaries, management fees and
incentives, gratuities, bonuses, and consulting fees. The
amended complaint alleges that payments to Daniel's children and
son-in-law "do not constitute reasonable salaries for work which
they actually performed and that some of those children and/or
their spouses were 'phantom' or 'ghost' employees who performed
little or no work at all." App. at 21 (Amended Complaint ("AC")
¶ 25).
The first Price Waterhouse report also noted that, in
addition to receiving compensation from Tabas Enterprises,
certain members of Daniel's family also worked for and received
compensation from Royal Bank. For instance, Lee Tabas served as
President of Royal Bank, Robert Tabas served as Vice President,
and Susan Tabas Tepper served as Director of Marketing.
Finally, in addition to the above findings, both Price
Waterhouse reports noted that "the Estate may also have been
subjected to the risk of additional taxes, interest, and
penalties" due to apparent Internal Revenue Service reporting
violations by Tabas Enterprises. App. at 362, 467.
B.
Count I of the amended complaint alleges that, in
violation of 18 U.S.C. § 1962(a), (b), and (c), the defendants
conspired to defraud the Estate of its equal share of Tabas
Enterprises' income, to which it was entitled under the
partnership agreement, through a pattern of racketeering activity
including mail fraud in violation of 18 U.S.C. § 1341.12
Specifically, plaintiffs allege that defendants conducted a
scheme to defraud the Estate of its equal share of the
partnership's income by wrongfully diverting Tabas Enterprises
funds to pay for the personal expenses of Daniel and his family
and by understating the Estate's share of the income. Plaintiffs
assert that, from the time of Charles's death through the period
in which the amended complaint was filed, Daniel "continuously
made false representations to the Estate by mail and fraudulently
distributed millions of dollars of Tabas Enterprises' funds to
himself and to members of his family in a scheme to defraud the
Estate of income to which it was entitled." App. at 20 (AC ¶
24).
Plaintiffs specifically allege that Daniel, Campbell,
and McSwiggan committed forty-one acts of mail fraud between
December 1987 and February 1991 for "the purpose of executing the
12
Count II of the amended complaint alleges that defendants
violated § 1962(d) by conspiring to violate subsections (a), (b),
and (c).
Counts III-VI of the amended complaint allege state law
claims that are not central to this appeal, including breach of
fiduciary duty, breach of contract, fraud, and conversion. The
district court dismissed these state law claims without
prejudice. Because we find that the district court erred in
dismissing Counts I and II, we will instruct the district court
to vacate the dismissal of plaintiffs' supplemental state law
claims.
scheme to defraud the Estate of its equal share of income." App.
at 43 (AC ¶ 49).13 Thirty-nine of these forty-one acts
represented monthly disbursements of $15,000 from Tabas Brothers
(a holding of Tabas Enterprises) to the Estate. The remaining
two acts involve the mailing of various IRS forms from Tabas
Enterprises to the Estate reflecting income earned and business
expenses incurred by certain Tabas Enterprises entities.
Plaintiffs contend that the mailing of the monthly checks by
defendants "constituted an intentional misrepresentation" that
one-half of the income of Tabas Enterprises was being paid to the
Estate pursuant to the partnership agreement. App. at 46 (AC ¶
50).
Finding that the dispute did not present a sufficient
threat to satisfy RICO's "continuity" requirement, the district
court granted defendants' summary judgment motion. The district
court reasoned that:
Plaintiffs' claims essentially allege one fraudulent
scheme perpetrated against one victim by one
perpetrator. The gist of plaintiffs' complaint is that
Daniel Tabas has failed to abide by the partnership
agreement made with his brother, Charles, and that
Daniel has employed various methods of trickery to
13
Plaintiffs also allege as predicate acts defendants' use of
the United States mails to send checks to Daniel's children and
son-in-law for work not performed. We do not rely on these
allegations, however, because plaintiffs have not produced any
evidence to counter McSwiggan's deposition testimony that these
checks were delivered by courier. See, e.g., Utz v. Correa, 631
F. Supp. 592, 596 (S.D.N.Y., 1986) (delivery of letter by
messenger did not violate the mail fraud statute since the United
States mails were not used).
cheat Charles's heirs of their fifty percent share of
the business that Charles and Daniel built. The sole
victim of this scheme is Charles Tabas's estate. The
sole perpetrator is Daniel Tabas or individuals under
his control. No one else is affected. There is no
threat to the community at large. This is not a case
where the predicate acts are "part of an entity's
regular way of doing business," such as would affect
others doing business with the entity.
The partnership between Charles and Daniel is
currently in the process of liquidation. All of the
fraudulent activity alleged in this suit will cease
once the liquidation process is complete. Given the
Court of Appeals' admonition that "[i]t remains an open
question whether RICO liability is ever appropriate for
a single-scheme, single-victim conduct threatening no
future harm," we simply do not find that the
defendants' alleged conduct in this case "pose[s] a
societal threat worthy of the draconian penalties and
remedies available under RICO."
District Court opinion at 8-10; App. at 1376-78 (citations
omitted) (footnotes omitted). Plaintiffs filed a timely notice
of appeal of the district court's grant of summary judgment to
defendants. Defendants also filed an appeal, seeking review of
the district court's decision to dismiss the state claims without
prejudice. Following the filing of the panel's decision, we
granted appellants' petition for rehearing in banc and vacated
the panel opinion.
II.
The district court had subject matter jurisdiction over
this civil action pursuant to 28 U.S.C. §§ 1331 and 1367. The
district court's federal question jurisdiction was invoked
because Counts I and II of the amended complaint raise claims
under RICO, 18 U.S.C. §§ 1961 and 1962. The district court's
supplemental jurisdiction was invoked because Counts III through
VI of the amended complaint raise claims that are so related to
the claims in Count I and II that they form part of the same case
or controversy under Article III of the United States
Constitution. The district court's supplemental jurisdiction
was invoked because Counts III through VI of the amended
complaint raise claims that are so related to the claims in Count
I and II that they form part of the same case or controversy
under Article III of the United States Constitution. Under 28
U.S.C. § 1291, this Court has appellate jurisdiction over the
final orders of the district court.14
This Court has plenary review over the district court's
grant of summary judgment. See Northern Ins. Co. v. Aardvark
Assocs., 942 F.2d 189, 194 n.5 (3d Cir. 1991). On review of the
district court's order for summary judgment, "we 'apply the same
test the district court should have utilized initially.'" Erie
Telecommunications v. Erie,
853 F.2d 1084, 1093 (3d Cir. 1988)
(citation omitted). "In reviewing a grant of summary judgment,
we must be convinced 'that the prevailing party has successfully
demonstrated that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a
14
The district court's first order, dated May 26, 1993,
granted defendants' motion for summary judgment on Counts I and
II, and dismissed Counts III, IV, and V pursuant to 28 U.S.C. §
1367(c)(3). The district court's second order, dated June 2,
1993, amended the first order to include dismissal of Count VI
pursuant to § 1367(c)(3).
matter of law.'" Id. (citing Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 250 (1986); Celotex Corp. v. Catrett,
477 U.S. 317,
322 (1986)).
In determining whether summary judgment is appropriate,
"[t]he evidence of the non-movant is to be believed, and all
justifiable inferences are to be drawn in his favor." Anderson,
477 U.S. at 255. The inquiry is "whether the evidence presents a
sufficient disagreement to require submission to the jury or
whether it is so one-sided that one party must prevail as a
matter of law."
Id. at 251-52.
III.
The first issue we must address is defendants'
contention that this lawsuit is precluded by the 1987 settlement
agreement and the 1990 mutual release. This question was
considered by the panel only. We find defendants' argument to be
without merit.
First, binding arbitration by Judge Yohn holds the
present claims viable. The settlement agreement provides for
final, binding arbitration of any dispute "as to the provisions
of this Agreement or as to the implementation or operation of the
provisions of this Agreement" between Daniel and the Estate.
App. at 70 (Settlement Agreement ¶ 12). The very issue of
whether claims such as this lawsuit could be brought was
submitted to Judge Yohn, the arbitrator, who determined initially
that "the arbitrator has jurisdiction to rule upon the issue of
whether the Estate may make claims against Daniel M. Tabas
concerning his management of Tabas Enterprises subsequent to
November 20, 1987." App. at 1185 (Arbitration Award No. 8). On
the merits, Judge Yohn held that the Estate could pursue any
claims which it might have against Daniel "for an alleged breach
of his fiduciary duty [to the Estate] after November 20, 1987,"
and "for the unequal distribution of the income of Tabas
Enterprises subsequent to November 20, 1987." Id. at 1187.
Under the settlement agreement, Judge Yohn's decision
is "final, binding, and non-appealable," app. at 70 (Settlement
Agreement ¶ 12), and we must adhere to it under federal and
Pennsylvania law. See Apex Fountain Sales v. Kleinfeld, 818 F.2d
1089, 1094-95 & n.4 (3d Cir. 1987) (an arbitrator's decision is
binding under federal law unless "an arbitrator 'manifests an
infidelity'" to her obligation to interpret the agreement at
issue, or there is "corruption, fraud or partiality," or a party
was denied a "fundamentally fair hearing") (citations omitted);
International Brotherhood of Firemen & Oilers v. School Dist.,
350 A.2d 804, 808 (Pa. 1976) (an arbitrator's decision shall not
be set aside "unless it is alleged and proven by clear, precise
and convincing evidence that the parties were denied a hearing or
that there was fraud, misconduct, corruption or some other
irregularity of this nature on the part of the Arbitrator which
caused him to render an unjust, inequitable or unconscionable
finding"). Defendants have not alleged any action on the part of
Judge Yohn amounting to corruption, fraud, or partiality. In
addition, defendants have presented no evidence that Judge Yohn
failed to provide a hearing to consider each party's views prior
to his decision. In fact, the record clearly indicates that
Judge Yohn held a hearing on this question and considered
numerous exchanges of correspondence before ruling on this
matter.
Second, even if we were to make our own evaluation of
whether the 1987 settlement agreement and the 1990 release
precluded this lawsuit, we would conclude that it does not.
Defendants' reliance on Main Line Theatres, Inc. v. Paramount
Film Distrib. Corp., 298 F.2d 801 (3d Cir.), cert. denied,
370
U.S. 939 (1962), is misplaced. Defendants assert that Main Line
stands for the proposition that where "the initial lawsuit
contained prayers for injunctive relief, the execution of a
general release releases and extinguishes complaints for future
conduct." Defendants-appellees' Brief at 21. Consequently,
defendants contend, plaintiffs' suit is barred by the settlement
agreement and the mutual release signed by the Estate and Daniel.
In Main Line, plaintiffs demanded injunctive relief and
treble damages in a civil antitrust suit stemming from
Paramount's distribution of motion pictures. The district court
dismissed the suit, holding that the case had been settled during
pre-trial negotiations by an "oral agreement" between the
parties. The oral agreement provided that Main Line would drop
its suit in exchange for $10,000. Main Line refused to comply
with the oral agreement, however, complaining that Paramount
attempted to add language to the agreement when it was
memorialized in writing. Specifically, Main Line rejected
language that required it to acknowledge that the complained of
distribution procedures were reasonable.
Main Line appealed the dismissal to this court. We
then considered whether the initial oral agreement included a
release to the effect that Paramount could continue to distribute
films in the same manner it had prior to Main Line's suit for
injunctive relief. We noted:
Had this been an action for damages only, without a
prayer that the defendants be restrained from
continuing or repeating the licensing practices of
which the plaintiff complained, the essential feature
of any understanding to settle the suit for a stated
sum would have been the plaintiffs' promise to forego a
money claim, the only matter in controversy. Here, the
suit contained a demand for injunctive prohibition of
future wrongful conduct as well as a claim for money
damages for alleged past misconduct. In such
circumstances a reasonable person agreeing, without any
expression of limitation, to accept a sum in settlement
of the litigation should and reasonably would
understand that both aspects of the suit were covered
by the settlement.
298 F.2d at 803 (emphasis added).
In Main Line, plaintiffs could point to no limitations,
expressed or implied, in their oral agreement with defendants.
Accordingly, their settlement agreement covered their prayers for
both injunctive relief and money damages. In the present case,
however, the mutual release signed by plaintiffs and Daniel
expressly limits the applicability of the release to any claims
arising "from the beginning of the world to November 20, 1987."
App. at 294. This express limitation distinguishes the instant
case from the facts presented in Main Line.
Defendants also draw the Court's attention to our
statement in Main Line that "[c]ertainly, a defendant offering a
sum in settlement of a suit asking, among other things, for an
injunction against similar conduct, would not understand that a
similar demand could be asserted the day after settlement." 298
F.2d at 803 (emphasis added). The Estate's state suit here,
however, although denominated a "Complaint in Equity," did not
seek broad injunctive relief. The holding in Main Line relies on
the fact that the plaintiff specifically sought to enjoin
Paramount from distributing motion pictures using methods that
plaintiff alleged violated the civil antitrust laws. In the
instant case, the plaintiffs' state suit asked that Daniel be
removed from any position at Tabas Enterprises and that its
businesses and properties be liquidated. Rather than controlling
future conduct, the state suit primarily sought a dissolution of
Tabas Enterprises and redress for the alleged past wrongs
committed against the Estate's interest in the partnership. It
follows, therefore, that the subsequent federal action did not
constitute an effort to enjoin conduct that the settlement of the
first suit had resolved. This determination, together with our
earlier finding that the settlement agreement bars only claims
existing up to November 20, 1987, would lead us to conclude that
defendants' reliance upon Main Line is misplaced.
IV.
Having found that plaintiffs' lawsuit is not precluded
by the 1987 settlement agreement and the 1990 mutual release, we
now turn to the district court's decision that plaintiffs failed
to allege a course of conduct sufficient to establish a RICO
"pattern of racketeering conduct" because plaintiffs failed to
satisfy RICO's "continuity" requirement.
The RICO statute provides for civil damages for "any
person injured in his business or property by reason of a
violation of [18 U.S.C. § 1962]." 18 U.S.C. § 1964(c). A common
thread running throughout § 1962 is that an injured party must
demonstrate that the defendant was engaged in a "pattern of
racketeering activity." Section 1962(a) prohibits "any person
who has received any income derived . . . from a pattern of
racketeering activity" from using that money to acquire or
operate any enterprise engaged in interstate commerce. Section
1962(b) prohibits any person from acquiring, maintaining an
interest in, or controlling any such enterprise "through a
pattern of racketeering activity." Section 1962(c) prohibits any
person employed by or associated with an enterprise engaged in
interstate commerce from conducting or participating in the
affairs of the enterprise through "a pattern of racketeering
activity." Finally, section 1962(d) prohibits any person from
conspiring to violate subsections (a), (b), or (c).
Central to the dispute in this case is the question
whether defendants participated in "a pattern of racketeering
activity." The RICO statute defines a "pattern" of racketeering
activity as requiring "at least two acts of racketeering
activity" within a ten year period. 18 U.S.C. § 1961(5). The
statute also enumerates the offenses which constitute
"racketeering activity," including crimes that have traditionally
been associated with the transgressions of racketeers: murder,
kidnapping, gambling, arson, robbery, bribery, extortion, dealing
in obscene matter, and dealing in narcotic or other dangerous
drugs. 18 U.S.C. § 1961(1). The statutory enumeration is,
however, expansive and goes on to include specific federal
offenses which, although they may often be committed by those
whom we would categorize as "racketeers," also fall into the
category of common law or "garden variety" fraud and which would,
in the past, have been the subject of commercial litigation under
state law. Among these broadly delineated federal offenses are
mail fraud and wire fraud.15 These offenses are the ones that
15
Mail fraud, 18 U.S.C. § 1341, is the racketeering activity
involved in the case before us. Section 1341 provides in
pertinent part:
Whoever, having devised . . . any scheme or
artifice to defraud, or for obtaining money
or property by means of false or fraudulent
pretenses, representations, or promises, . .
. for the purpose of executing such scheme or
artifice . . . places in any post office or
authorized depository for mail matter, any
many consider to be the most troublesome as RICO predicate acts.
The inclusion within the scope of civil RICO of these
types of fraud, more prevalent in the commercial world than in
the world of racketeers, has caused concern that RICO sweeps too
broad a swathe. See, e.g., Note, Civil RICO: The Temptation and
Impropriety of Judicial Restriction, 95 Harv. L. Rev. 1101, 1105
(1982) ("Given the prevalence of mail and wire use in commercial
transactions, RICO's provision for a private cause of action
predicated on violations of the mail and wire fraud statutes
virtually federalizes common law fraud").
matter or thing whatever to be sent or
delivered by the Postal Service, . . . shall
be fined not more than $1,000 or imprisoned
not more than five years, or both.
The federal offense of mail fraud was originally
enacted by Congress in 1872 as a part of the recodification of
the postal laws. The Supreme Court in its first review of the
mail fraud statute made clear that its scope was broad. The
Court held that the statute reached beyond the common law
definition of "false pretences" to encompass "everything designed
to defraud by representations as to the past or present, or
suggestions and promises as to the future." Durland v. United
States, 161 U.S. 306, 313 (1896). Fraud, involving the use of
the postal system to carry it out, was made a federal offense by
Congress with the "purpose of protecting the public against all
such intentional efforts to despoil, and to prevent the post
office from being used to carry them into effect . . .."
Id. at
314.
Judge Greenberg, in his dissent, queries whether
Congress intended RICO to be applied to a defendant,
participating in a scheme to defraud, who mails substantial
payments but not to a similar defendant who delivers the payments
by hand. See [typescript at 14]. The clear answer to this
question is "yes" because, first, the former example constitutes
mail fraud and the latter does not and, second, Congress has
chosen to include mail fraud as a RICO predicate act.
If we examine the language of the statute itself, in an
attempt to discern the scope of civil RICO, we find ourselves
lost in a land with few signposts. Section 1961(5) defines
"pattern" as requiring "at least two acts of racketeering
activity." The breadth of the predicate acts, described in §
1961(1), combined with § 1961(5)'s loose definition of pattern,
has led many courts to recoil from the inclusion within RICO of
offenses which were not considered to be the crimes of gangsters.
Such court-imposed limitations on the scope of civil RICO were
first reviewed by the Supreme Court in Sedima, S.P.R.L. v. Imrex
Co., 473 U.S. 479 (1985). In Sedima, the Supreme Court set out
an expansive definition of the concept of "pattern" in civil
RICO.
Sedima arose from an action filed in the Eastern
District of New York by a Belgian corporation, based on § 1964(c)
and (d) and predicate acts of mail fraud and wire fraud, charging
that Imrex, Sedima's partner in a joint venture, had presented
inflated bills and had cheated Sedima out of a portion of its
proceeds by collecting for nonexistent expenses. The district
court dismissed the RICO counts for failure to state a claim,
holding that a RICO-type injury must be based on allegations of
some sort of distinct "racketeering injury" or "competitive
injury." 574 F. Supp. 963, 965 (1983). The dismissal was
affirmed by a divided panel of the Second Circuit Court of
Appeals.
741 F.2d 482 (1984). The court of appeals clarified
the type of injury which it required to be alleged, finding that
"it is better to identify the RICO standing requirement as a
'racketeering injury' requirement rather than a 'competitive
injury' requirement . . .."
Id. at 496. The court of appeals
further required that, before a private civil RICO action could
be brought, the plaintiff must show that the defendants had been
criminally convicted of the predicate acts.
Id. at 503. The
Supreme Court rejected both of these holdings.
Justice White, writing for the majority in Sedima,
stated "we can find no support in the statute's history, its
language, or considerations of policy for a requirement that a
private treble-damages action under § 1964(c) can proceed only
against a defendant who has already been criminally convicted."
473 U.S. at 493. Concerning the requirement of racketeering
injury, Justice White stated that
[W]e perceive no distinct "racketeering
injury" requirement. Given that
"racketeering activity" consists of no more
and no less than commission of a predicate
act, § 1961(1), we are initially doubtful
about a requirement of a "racketeering
injury" separate from the harm from the
predicate acts. A reading of the statute
belies any such requirement. . . . If the
defendant engages in a pattern of
racketeering activity in a manner forbidden
by these provisions [§ 1962(a)-(c)], and the
racketeering activities injure the plaintiff
in his business or property, the plaintiff
has a claim under § 1964(c). There is no
room in the statutory language for an
additional, amorphous "racketeering injury"
requirement.
Id. at 495.
Justice White based this less restrictive reading of
the statute on prior case law and the general principles
surrounding the statute: "RICO is to be read broadly. This is
the lesson not only of Congress' self-consciously expansive
language and overall approach, but also of its express admonition
that RICO is to 'be liberally construed to effectuate its
remedial purposes.'" Id. at 497-98 (citations omitted).
The Court recognized that this interpretation of the
statute would permit its use not only against mobsters and
organized criminals but also against "respected and legitimate
'enterprises.'" Id. at 499. Nevertheless, the Court found that
Congress "wanted to reach both 'legitimate' and 'illegitimate'
enterprises. "The former enjoy neither an inherent incapacity
for criminal activity nor immunity from its consequences."
Id.
(citation omitted). The Court concluded:
It is true that private civil actions
under the statute are being brought almost
solely against such defendants, rather than
against the archetypal, intimidating mobster.
Yet this defect--if defect it is--is inherent
in the statute as written, and its correction
must lie with Congress. It is not for the
judiciary to eliminate the private action in
situations where Congress has provided it
simply because plaintiffs are not taking
advantage of it in its more difficult
applications.
Id. at 499-500 (footnote omitted).
Justice White then suggested that Congress and the
courts develop a meaningful concept of "pattern" in order to
narrow the scope of civil RICO:
The "extraordinary" uses to which civil RICO
has been put appear to be primarily the
result of the breadth of the predicate
offenses, in particular the inclusion of
wire, mail, and securities fraud, and the
failure of Congress and the courts to develop
a meaningful concept of "pattern."
Id. at 500.
Despite this invitation from the Court, Congress to
date has not chosen to enact legislation which would narrow the
scope of civil RICO or to define more exactly what is "pattern."
Moreover, the efforts of the courts to do so have not been
entirely successful. Our attempts to design a meaningful concept
of pattern have continued to collide with the broad language of
the statute. In response, however, to Sedima, the various
circuits began to structure guidelines for determining whether a
RICO pattern had been established. In the Third Circuit, for
instance, in Barticheck v. Fidelity Union Bank/First Nat'l State,
832 F.2d 36 (3d Cir. 1987), we rejected the district court's
requirement in that case that there be two or more unlawful
schemes, and we then set forth six factors to be used in
determining whether a pattern of racketeering activity has been
established in a given case. These factors are: (1) the number
of unlawful acts; (2) the length of time over which the acts were
committed; (3) the similarity of the acts; (4) the number of
victims; (5) the number of perpetrators; and (6) the character of
the unlawful activity.
Id. at 39.
Other circuits established other criteria. In the
Eighth Circuit, the test for a pattern of racketeering activity
was much more restrictive: proof of multiple illegal schemes was
required. See, e.g., Superior Oil Co. v. Fulmer, 785 F.2d 252
(8th Cir. 1986). Following this precedent, the Eighth Circuit
Court of Appeals affirmed the district's court's dismissal of
petitioners' complaint in H.J. Inc. v. Northwestern Bell Tel.
Co.,
829 F.2d 648 (8th Cir. 1987). The Supreme Court granted
certiorari to resolve the conflict between the circuits over
whether single or multiple schemes were required to demonstrate a
RICO pattern.
In its opinion in H.J. Inc. v. Northwestern Bell Tel.
Co., 492 U.S. 229 (1989), the Court set out its second analysis
of the requirements of civil RICO. First, as to single versus
multiple schemes, the Court noted that the word "scheme" is not
found in the RICO statute and indeed that what constitutes a
"scheme" is to be found "in the eye of the beholder, since
whether a scheme exists depends on the level of generality at
which criminal activity is
viewed." 492 U.S. at 241 and n.3.
The Court then examined the statute and its legislative history
in an attempt to determine the elements of the pattern
requirement. From this review, the Court concluded that "to
prove a pattern of racketeering activity a plaintiff must show
that the racketeering predicates are related, and that they
amount to or pose a threat of continued criminal activity."
Id.
at 239.
Under the first, or "relatedness," requirement of the
RICO statute, as interpreted in H.J. Inc., predicate acts are
related if they "have the same or similar purposes, results,
participants, victims, or methods of commission, or otherwise are
interrelated by distinguishing characteristics and are not
isolated events." Id. at 240 (quoting the partially repealed
Title X of the Organized Crime Control Act of 1970, 18 U.S.C. §
3575, et seq.).16
As for the second, or "continuity," prong of the
analysis, the Court in H.J. Inc. attempted to promulgate a
somewhat flexible approach, based upon a "commonsense, everyday
understanding of RICO's language and Congress' gloss on it." Id.
at 241. With this analytical approach in mind, the Court decided
that "[w]hat a plaintiff or prosecutor must prove is continuity
of racketeering activity, or its threat, simpliciter."
Id.
In explicating how a plaintiff could make this
continuity showing, the Court described continuity as "both a
closed- and open-ended concept, referring either to a closed
period of repeated conduct, or to past conduct that by its nature
projects into the future with a threat of repetition."
Id. "It
16
The parties do not dispute that the relatedness prong has
been met in the present case.
is, in either case, centrally a temporal concept,"
id. at 241-
42, so that a party may establish continuity as a closed-ended
concept by "proving a series of related predicates extending over
a substantial period of time."
Id. at 242 (emphasis added).
Thus, H.J. Inc. makes clear that the continuity
requirement can be met by establishing long-term criminal conduct
but does not define what length of time qualifies as
"substantial" for this purpose. The Court in H.J. Inc. also gave
examples of how the threat of continued racketeering activity
might be demonstrated. One example is that of a hoodlum who
sells "insurance" to storekeepers to prevent the breaking of
their shop windows. Id. Another example is that of an ongoing
entity which commits the predicate acts or offenses as its
regular way of doing business.
Id. In giving this last example,
the Court noted that such a business may be either a criminal or
a legitimate enterprise and concluded:
The continuity requirement is likewise
satisfied 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), or of
conducting or participating in an ongoing and
legitimate RICO "enterprise."
Id. at 243 (footnote omitted). The clear implication of this
language is that the ambit of RICO may encompass a "legitimate"
businessman who regularly conducts his business through
illegitimate means, that is, who repeatedly defrauds those with
whom he deals and in the process commits predicate acts, for
instance by using the postal service as a means of accomplishing
his scheme.
The Court went on in H.J. Inc., at the urging of
various amici, to consider, and to reject, a requirement that "a
defendant's racketeering activities form a pattern only if they
are characteristic either of organized crime in the traditional
sense, or of an organized-crime-type perpetrator, that is, of an
association dedicated to the repeated commission of criminal
offenses." Id. at 243-44. The Court found that there was no
textual support in the statute for such a requirement and that
the statutory language did not support the limitation that
racketeering acts be the work of an association or group rather
than of an individual.
Id. at 244.
These determinations in H.J. Inc., that the predicate
acts may be the regular way in which a legitimate business
operates and that the racketeering activities may form a pattern
even though they are the acts of an individual rather than of a
group or of an association, enforce the Court's holding in Sedima
that RICO reaches both "legitimate" and "illegitimate"
enterprises. The Court in H.J. Inc. also rejected the employment
of a definitional device, such as "scheme," to delineate
racketeering activity, when the device employed, like "scheme,"
may be manipulated to satisfy the necessary criterion. See id.
at 241 and n.3.
Whatever view we may have of Congress's original intent
in enacting the RICO statute, we feel constrained, in applying
the statute today, to follow the directives given by the Court in
Sedima and H.J. Inc.
Since H.J. Inc., this court has faced the question of
continued racketeering activity in several cases, each time
finding that conduct lasting no more than twelve months did not
meet the standard for closed-ended continuity. See Hughes v.
Consol-Pennsylvania Coal Co., 945 F.2d 594, 610-11 (3d Cir. 1991)
(fraudulent conduct lasting twelve months does not establish
closed-ended continuity); Hindes v. Castle,
937 F.2d 868, 875 (3d
Cir. 1991) (eight month period of predicate acts without a threat
of future criminal conduct does not satisfy continuity
requirement); Kehr Packages v. Fidelcor, Inc.,
926 F.2d 1406,
1413 (3d Cir. 1991) (same); Banks v. Wolk,
918 F.2d 418, 422-23
(3d Cir. 1990) (same); Marshall-Silver Constr. Co. v. Mendel,
894
F.2d 593 (3d Cir. 1990) (seven month single-victim, single-injury
scheme does not satisfy continuity requirement).17 In Hughes, we
17
In Marshall-Silver, we considered whether Congress intended
RICO to apply in the situation of an extended scheme which posed
no "significant societal threat" beyond its extended duration.
894 F.2d at 597. Because the scheme there lasted only seven
months and posed no threat of recurrence, we stated that we would
not resolve the "societal threat" issue. In view, however, of
the Court's refusal in Sedima and H.J. Inc. to require
racketeering injury, or prior conviction of the predicate acts,
or multiple schemes, or racketeering acts by an association or
group rather than by an individual, we cannot conclude that, in
order to satisfy the RICO continuity requirement, the Court would
require the existence of a "societal threat," whatever exactly
that may be, beyond the commission of the criminal predicate
distinguished cases in other circuits in which closed-ended
continuity had been established, noting that those cases involved
conduct lasting "years, sometimes over a decade."
Hughes, 945
F.2d at 611.
In evaluating the present case in accord with this
precedent, we will first consider whether closed-ended continuity
has been established. At the outset, we note that in civil RICO
complaints based on predicate acts of mail fraud
the continuity test requires us to look beyond the
mailings and examine the underlying scheme or artifice.
Although the mailing is the actual criminal act, the
instances of deceit constituting the underlying
fraudulent scheme are more relevant to the continuity
analysis.
acts. To the extent that Marshall-Silver can be read to hold
otherwise, it is overruled.
Kehr Packages, 926 F.2d at 1414.18 Consequently, in determining
18
Defendants' assertion that the mailings involved must
themselves be relied upon by the victim of the fraud in order for
a RICO claim to be established is inaccurate. As this Court
stated in Kehr Packages, "completely 'innocent' mailings can
satisfy the mailing element." 926 F.2d at 1415 (citing Schmuck
v. United States,
489 U.S. 705, 715 (1989)). Indeed, mailings
"designed to lull [fraud] victims into a false sense of security,
postpone their ultimate complaint to the authorities, and
therefore make the apprehension of the defendants less likely
than if no mailings had taken place" have been found to
constitute actionable mail fraud. Kehr
Packages, 926 F.2d at
1416 n.3 (quoting United States v. Lebovitz,
669 F.2d 894, 896
(3d Cir.), cert. denied,
456 U.S. 929 (1982)).
Additionally, the use of the mails need not be an
essential element of the fraudulent scheme. Rather, so long as
the mailings are "incident to an essential part of the scheme,"
Pereira v. United States, 347 U.S. 1, 8 (1954), the mailing
element is satisfied. This principle is elucidated by a review
of the facts in Schmuck v. United States,
489 U.S. 705 (1989).
In that case, Wayne Schmuck was engaged in a fraudulent scheme in
which he would purchase used cars, roll back their odometers, and
sell the cars to retailers for a price higher than their actual
worth. After purchasing an automobile from Schmuck and selling
it to a customer, the dealers, in order to complete the resale of
each automobile, would submit a title application form to the
Wisconsin Department of Transportation. The mailing of these
forms constituted the mailing element of Schmuck's indictment on
12 counts of mail fraud. The Supreme Court found that those
mailing were sufficient to sustain Schmuck's indictment on mail
fraud charges, reasoning that
Schmuck's scheme would have come to an abrupt halt if
the dealers either had lost faith in Schmuck or had not
been able to resell the cars obtained from him. These
resales and Schmuck's relationship with the retail
dealers naturally depended on the successful passage of
title among the various parties. Thus, although the
registration-form mailings may not have contributed
directly to the duping of either the retail dealers or
the customers, they were necessary to the passage of
title, which in turn was essential to the perpetuation
of Schmuck's scheme.
Id. at 712.
whether or not continuity has been established in the present
case, we must focus on the duration of the underlying scheme.
Just as the mailings are an element of the federal offense of
mail fraud, so too is the scheme or artifice to defraud. See 18
U.S.C. § 1341, set out in
footnote 15 supra. Each time
defendants misrepresented the business nature of an expense, made
a questionable charge, or received compensation to which they
were not entitled, they lessened the income available to the
Estate. Plaintiffs have provided evidence that these activities,
which implemented defendants' purported scheme to defraud the
Estate, lasted more than three and a half years, from November
10, 1987, to July 1991. We conclude that a scheme lasting over
three years extends over a "substantial" period of time and
therefore constitutes the type of "long-term criminal conduct"
that RICO was enacted to address. See United States v. Pelullo,
964 F.2d 193, 209 (3d Cir. 1992) (holding that a jury could find
a nineteen month period of racketeering activity sufficient to
In the instant case, it is clear that the mailings were
incident to an essential part of the scheme. Had the defendants
failed to mail disbursement checks to plaintiffs, plaintiffs
would have immediately been alerted to defendants' alleged
scheme. Consequently, by virtue of the disbursements mailed to
plaintiffs, defendants were allegedly able to delay discovery of
their scheme to misappropriate an excessive share of the
partnership's profits. The scheme could not have continued
unless the checks were delivered by one means or another. As
long as the method of delivery was through the United States
Postal Service, defendants' alleged scheme satisfied the elements
of the federal offense of mail fraud.
satisfy continuity requirement); Swistock v. Jones, 884 F.2d 755,
759 (3d Cir. 1989) (fourteen month period of conduct may be
sufficient to establish closed-ended continuity). Accordingly,
we find, from the strictly durational aspect of the scheme, that
plaintiffs in the present case have made a sufficient showing to
survive summary judgment on the "continuity" prong of the pattern
analysis.
The Supreme Court cautions us, however, in H.J. Inc.,
that the existence of continuity may not always be apparent. 492
U.S. at 243. For example, the statutory definition of pattern is
"at least two acts of racketeering activity" within a ten year
period. 18 U.S.C. § 1961(5). It is clear that ten years is a
period of long duration. Yet, would two related predicate acts,
one committed in February 1982 and one committed in January 1992,
be sufficient to form a pattern? It would seem unlikely.
Indeed, Justice White noted in a footnote that, while § 1961(5)
defines a pattern of racketeering activity as requiring at least
two acts of racketeering activity, two acts may not be
sufficient.
Id. at 496 n.14.
The question remains, then, what more is required in
order to evaluate whether continuity has been established when
predicate acts have occurred over a period of several years. One
helpful consideration can be found in the Court's requirements
for open-ended continuity. In H.J. Inc. the Court states that
open-ended continuity is established when the commission of the
predicate acts is "a regular way of conducting defendant's
ongoing legitimate business." 492 U.S. at 243. It would seem a
valid analogy that, if the predicate acts have been a regular way
of conducting defendant's legitimate business over a long period
in the past, the RICO pattern has been satisfied.19 In such a
case, the relatedness and the frequency of the predicate acts
would have created the pattern of racketeering activity. From
our review of the record in the present case, we find that the
allegations made by plaintiffs concerning defendants' manner of
doing business over this period satisfy such a RICO continuity
requirement.20
19
In making this analogy, we in no way imply that the
predicate acts must constitute a "regular way" of a defendant's
doing business. We merely give one example of the manner in
which "pattern" may be demonstrated.
20
The district court, in granting summary judgment to
defendants, found that "[t]his is not a case where the predicate
acts are 'part of an entity's regular way of doing business,'
such as would affect others doing business with the entity."
App. at 1377. (citing H.J. Inc., 492 U.S. at 242).
See supra at
page [typescript at 16].
To the extent that the district court suggests that
effects upon others doing business with the entity are relevant
to a finding of "continuity," we are not certain if the district
court is requiring that those affected be outsiders doing
business with the entity, as opposed to investors or partners in
or beneficiaries of the entity. If so, we find no support in
H.J. Inc. for such a requirement. The implication of the cited
passage in H.J. Inc. does not limit its holding to require that
the effect be on those who are doing business with the entity.
If, on the other hand, the district court was making a
finding of fact on the scope of the defendants' regular way of
doing business, i.e., that the alleged scheme to defraud the
Estate and its beneficiaries, through the repeated actions
described by Price Waterhouse, did not constitute defendants'
regular way of doing business, then in view of the facts of
Moreover, even if we were not to have found that
conduct lasting three and one-half years was sufficient to
establish closed-ended continuity, we conclude that continuity
still would have been established for the purposes of summary
judgment in the present case under an "open-ended" continuity
analysis. Under H.J. Inc., if a RICO action is brought before a
plaintiff can establish long-term criminal conduct, the
"continuity" prong may still be met if a plaintiff can prove a
threat of continued racketeering activity. Whether the predicate
acts constitute a threat of continued racketeering activity
depends on "the specific facts of each case," id. at 242, but
H.J. Inc. suggests that open-ended continuity may be satisfied
"where it is shown that the predicates are a regular way of
conducting defendant's ongoing legitimate business . . . or of
conducting or participating in an ongoing and legitimate RICO
'enterprise.'"
Id. at 243.
Mindful that Kehr Packages instructs us, in determining
continuity, to focus on the mail fraud element of the underlying
fraudulent activity as well as on the element of the mailings, we
are persuaded that the evidence here meets the standard for open-
ended continuity. Plaintiffs have presented evidence that
defendants continuously took questionable expenses, which
directly affected the partnership income available to the Estate.
record, we must conclude that such a finding of fact is clearly
erroneous.
Both Price Waterhouse reports are replete with examples of
expense charges taken by defendants for which there is not
adequate documentation or explanation to substantiate an ordinary
and necessary business purpose. These included trips, meals,
home services, cars, gasoline, insurance expenditures, and
telephone bills.
At this stage of the litigation, we must view the facts
in the light most favorable to plaintiffs, the non-movants, i.e.,
that as a regular way of doing business, defendants were
fraudulently misrepresenting expenditures to benefit themselves
and to deprive the Estate and its beneficiaries of their
legitimate share of the profits of Tabas Enterprises. The
evidence in the record is clear that these practices, defendants'
regular way of doing business, continued even after plaintiffs'
complaint was filed. As a consequence, plaintiffs have
established a threat of continuing fraudulent conduct as required
under an "open-ended" continuity analysis.
Because we have found a pattern of racketeering
activity in both the duration of and the on-going threat implicit
in defendants' regular way of doing business, we will not go on
to analyze this case under the six Barticheck factors. The fact
that we do not employ the Barticheck factors in our analysis here
does not, however, mean that they might not be relevant in a
different case in determining if continuity exists. As the Court
noted in H.J. Inc., in those cases where relatedness and
continuity are in doubt, other factors should be examined to
discern if there is a "pattern of racketeering activity" under
RICO:
The limits of the relationship and continuity concepts
that combine to define a RICO pattern, and the precise
methods by which relatedness and continuity or its
threat may be proved, cannot be fixed in advance with
such clarity that it will always be apparent whether in
a particular case a "pattern of racketeering activity"
exists.
492 U.S. at 243. It is helpful, therefore, when determining
whether "relatedness" or "continuity" has been proven, to use a
fact-oriented, case-by-case approach to determine whether there
is a "pattern of racketeering activity."21
21
Although we decided Barticheck before H.J. Inc., we have
since noted that the six Barticheck factors are still relevant in
determining whether a pattern exists. See Hindes v. Castle, 937
F.2d 868, 873 n.3 (3d Cir. 1991) ("[T]he Barticheck factors, such
as the number of acts, victims, and perpetrators and the
character of the unlawful activity, may be relevant in some cases
in assessing the threat of continuing criminal conduct by
throwing light on whether the illegal activity was part of a
legitimate business' regular way of conducting business, or
whether the predicates were attributable to a 'long-term
association that exists for criminal purposes.'") (citation
omitted).
It remains clear, however, that "duration is the sine
qua non of continuity." Hindes, 937 F.2d at 873. For this
reason, the Barticheck factors are best viewed as analytical
tools available to courts when the issue of continuity cannot be
clearly determined under either a closed- or open-ended analysis.
It should also be noted that the H.J. Inc. decision
cites the Third Circuit's holding in Barticheck for two narrow
propositions only: (1) that continuity is both a closed- and
open-ended concept, 492 U.S. at 238, and (2) that "scheme" is not
a self-defining
term, 492 U.S. at 241 n.3. Nowhere in H.J. Inc.
does the Supreme Court expressly adopt the Barticheck factors as
being required elements in the "continuity" analysis.
In the present case, we find that plaintiffs have
clearly presented evidence that is legally sufficient to survive
summary judgment on the issue of continuity through the
defendants' alleged commission of the predicate acts and of the
underlying fraudulent activity as an ongoing way of doing
business. Accordingly, we do not need to concern ourselves with
the applicability of the Barticheck factors to the specific facts
of this case.
We recognize that our ruling means that RICO, with its
severe penalties, may be applicable to many "garden-variety"
fraud cases, see Marshall-Silver, 894 F.2d at 597, particularly
considering the judiciary's broad interpretation of the mail
fraud statute. See Kehr
Packages, 926 F.2d at 1413-14. We are
bound, however, by the language of RICO itself and the Supreme
Court's instruction that "RICO is to be read broadly."
Sedima,
473 U.S. at 497. Indeed, the Supreme Court has consistently
struck down efforts by the courts of appeals to narrow RICO's
scope. See NOW v. Scheidler, 114 S. Ct. 798, 806 (1994)
(rejecting Seventh Circuit holding that RICO requires proof that
either the racketeering enterprise or the predicate acts of
racketeering were motivated by an economic purpose); H.J.
Inc.,
492 U.S. at 250 (rejecting Eighth Circuit holding that RICO
requires proof of multiple "schemes");
Sedima, 473 U.S. at 495
(rejecting Second Circuit holding that RICO requires proof of
prior conviction on predicate act and that plaintiff must
demonstrate specific "racketeering injury").
We share the Supreme Court's concern over the broad
application of the civil RICO statute. We are nonetheless bound
by the language of the statute and the Supreme Court's
interpretation of it. Accordingly, it is for Congress to decide
whether to narrow the scope of RICO; we are not in a position to
do so by requiring that parties prove elements of a threat or of
an injury, presented by predicate racketeering activity, beyond
what is expressed in the language of the statute itself.22
V.
Defendants have raised a number of alternative grounds
for summary judgment claiming that insufficient causation and
injury have been pleaded and that some of the defendants are not
22
The dissent relies upon our recent holding in Jordan v.
Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250 (3d Cir. 1994)
for the proposition that civil RICO should not be applicable in
cases lacking a significant societal threat. But see footnote 17
in regard to our position that there is no requirement in civil
RICO that the predicate acts pose a "societal threat." We find
several significant differences, however, between Jordan and the
dispute here. First, the duration and continuing nature of the
underlying fraudulent activity alleged here is much greater. In
addition, the district court in Jordan questioned the
"relatedness" of the predicate acts, see Jordan v. Berman, 792 F.
Supp. 380, 385-86 (E.D. Pa. 1992), and further held that
plaintiffs had failed to establish that they had sustained any
injury from the purported predicate acts.
Id. at 388. Finally,
and perhaps most importantly, the district court in Jordan found
that there was no evidence presented that would lead a jury to
believe that mail fraud had been committed.
Id. at 387. As
discussed above, we have come to a different conclusion in the
present dispute.
potentially liable under RICO. Because discovery has not been
completed, we find that it would be premature to address these
alternative grounds. Plaintiffs have sought to take additional
depositions that could have substantial bearing upon these
issues. Additionally, the district court did not rule on any of
the alternative grounds, and, as a consequence, it would be
inappropriate for us to consider them at this stage.23
VI.
For the foregoing reasons, we will reverse the district
court's decision granting summary judgment against plaintiffs on
their RICO claims, we will vacate the dismissal of plaintiffs'
supplemental state claim, and we will remand this case to the
district court for further proceedings consistent with this
opinion.24
BECKER, Circuit Judge, Concurring.
I
I join in almost all of Judge Roth's lead opinion
(including Parts I, II, V, and VI in their entirety), and I
23
We note that on remand the court should consider whether
the decision in Reves v. Ernst & Young, 113 S. Ct. 1163 (1993)
has any bearing on this case. In Reves, the Supreme Court held
that only defendants who participate in the operation or
management of an enterprise can be held liable for violating 18
U.S.C. § 1962(c).
24
In view of our vacatur of the dismissal of plaintiffs'
supplemental state claims, we do not need to rule on defendants'
cross-appeal.
concur in the judgment. I write separately, however, because I
believe that the opinion has "stopped short," and not carried the
logic of its argument to its ultimate conclusion. More
specifically, while Judge Roth's opinion makes clear that the
"Barticheck factors" cannot be the sine qua non of the continuity
determination, and its opinion undoubtedly erodes Barticheck's
precedential value, the court's logic -- as Judge Greenberg's
dissent recognizes, see Dissenting Op. at page 7, especially
lines 6-10 -- compels the conclusion that Barticheck should be
abandoned. Yet Judge Roth leaves it breathing and thereby will,
I fear, cause mischief by engendering confusion in the district
courts, in addition to a round of further appeals.
I recognize that Judge Roth's opinion does not in terms
rest on application of the six Barticheck factors. It is a fact,
however, that these factors have been at the heart of this
court's civil RICO jurisprudence for the past seven years, and
most district court opinions struggling with the existence vel
non of civil RICO continuity use Barticheck as their polestar.
In my view, now that we are in banc on a civil RICO case, it is
incumbent upon us to clarify the status of Barticheck, and the
lead opinion's avoidance of the issue is not grounds for putting
it off to another day. I therefore write separately in order to
set forth my understanding of the implications of this court's
decision.
II
Perhaps the most serious example of the uncertainty
needlessly sown by the jurisprudential reticence of Judge Roth's
opinion concerns Barticheck factor #6, the "character of the
unlawful activity." In my view, the opinion can be read as
leaving open the possibility that this factor, along with the
other Barticheck factors, survives today's decision. See Lead
Op. at page 40 ("The fact that we do not employ the Barticheck
factors in our analysis here does not, however, mean that they
might not be relevant in a different case in determining if
continuity exists.") (emphasis supplied); id. at 41 n.21 ("The
Barticheck factors . . . may be relevant in some cases in
assessing the threat of continuing criminal conduct . . . .")
(internal quotation marks omitted, emphases supplied). This is
apparently the conclusion drawn by Judge Greenberg, whose dissent
treats "character of the unlawful activity" as the most important
of the factors. See Dissenting Op. at pages 12, 15. But Judge
Roth's opinion does not explain how to distinguish this factor
from "societal threat," which, she properly holds (if less
emphatically than is warranted), cannot survive Sedima and H.J.,
Inc. See Lead Op. at page 34 n.17.
This reluctance to overrule Barticheck thus has the
unfortunate potential for contributing to doctrinal confusion,
for as Judge Greenberg argues in dissent, see Dissenting Op. at
page 7, a given factor either is or is not relevant to the
existence of a "pattern" of racketeering activity. The RICO
statute does not have one provision for cases where relatedness
and continuity (or their absence) are clear and another for
"those cases where relatedness and continuity are in doubt."
Lead Op. at page 40. Accordingly, I believe that we should inter
Barticheck as a whole, and should forthrightly announce which, if
any, Barticheck factors remain relevant to the continuity
analysis and which do not.
A.
As I read Judge Roth's opinion, it properly treats the
length of time over which the predicate acts were committed
(Barticheck factor #2), the number of unlawful acts (factor #1),
and the routineness or customariness of the acts (which in my
view is, as I explain below, the only permissible interpretation
of factor #6, the character of the unlawful activity) as relevant
for the continuity inquiry. Although Judge Roth does not discuss
Barticheck factors #3-#5 (similarity of acts, number of victims,
and number of perpetrators), I believe that its analysis shows
that these factors are irrelevant to the continuity inquiry.
As Judge Roth notes, continuity is "centrally a
temporal concept." Lead Op. at page 31 (quoting H.J., Inc., 492
U.S. at 242). It simply "refer[s] either to a closed period of
repeated conduct [closed-ended continuity], or to past conduct
that by its nature projects into the future with a threat of
repetition [open-ended continuity]."
Id. (quoting H.J., Inc.,
492 U.S. at 241) (alterations supplied here). Thus duration,
whether established duration or likely duration, is central to
the "continuity" aspect of a RICO "pattern." As a result, the
length of time over which the predicate acts occurred (Barticheck
factor #2) is of primary significance.
I agree with Judge Roth's view that something more is
needed to make out a "pattern," and that two related predicate
acts almost ten years apart are unlikely to suffice. See Lead
Op. at page 37. But the number of predicate acts (Barticheck
factor #1), on which her opinion properly relies in finding
continuity here, provides all that is needed for closed-ended
continuity. In conjunction with duration, the number of acts
suffices to show frequency -- a concept that, as Judge Roth's
opinion agrees, see Lead Op. at 6, provides an adequate
interpretation of "pattern" where completed, related acts are
concerned.
As the Supreme Court has explained, the definition of a
RICO "pattern" should accord with the plain meaning of that term.
In particular,
[a] "pattern" is an "arrangement or order of things or
activity," and the mere fact that there are a number of
predicates is no guarantee that they fall into any
arrangement or order. It is not the number of
predicates but the relationship that they bear to each
other or to some external organizing principle that
renders them "ordered" or "arranged."
H.J., Inc., 492 U.S. at 238, 109 S. Ct. at 2900 (citation
omitted).
As I see it, the continuity prong of pattern analysis
should be explicitly directed toward ruling out RICO liability
premised on two or more predicate acts that are related but
nonetheless "isolated" or "sporadic." See H.J., Inc., 492 U.S.
at 239, 109 S. Ct. at 2900 (discussing legislative history of the
"pattern" requirement). Courts then would be in a better
position to engage in reasonably meaningful discussions of
whether -- in the concrete circumstances of the case --
continuing racketeering activity had been adequately alleged.
But the Barticheck factors fail to provide the needed
guidance, and any attempt to use all six in continuity analysis,
in my view, is destined for failure, in part because these
factors were not originally intended to govern the continuity
inquiry. Rather, they originated as an attempt to distill our
case law on the RICO pattern requirement, simpliciter, not as an
explication of separate relatedness and continuity requirements.
See Barticheck, 832 F.2d at 38-39 ("Those cases . . . recognized
that the existence of a RICO pattern . . . turn[s] on . . . " a
combination of specific factors . . . .") (emphasis supplied).
Some of the Barticheck factors are relevant to this general
notion of pattern.25 Once "pattern" is analytically severed into
"relatedness" and "continuity," however, there is no reason to
25
I do not mean to suggest that the number of perpetrators or
victims, while irrelevant to continuity, is relevant to
relatedness, for it is not. The identity or other defining
characteristics of the victims and perpetrators, however, may
help establish relatedness of predicate acts.
insist that all six of the factors will logically bear on both
continuity and relatedness. Barticheck did not do so. Rather,
it discussed the various factors and concluded simply that the
plaintiffs had adequately alleged a RICO pattern. See id. at 39.
What Barticheck did do, however, was recognize that
continuity might be either open-ended or closed-ended, rejecting
the defendants' argument that RICO reached only conduct that was
potentially ongoing. See id. at 39-40. Furthermore -- and this
accords with my view that the factors should be analyzed as they
bear on screening out isolated or sporadic activity -- the
Barticheck panel said that the "continuity" language in the
legislative history cited in Sedima
simply call[ed] for an inquiry into the extent of the
racketeering activity. Although temporal open-
endedness may be one measure of extent, it is not the
only one. We decline to adopt a verbal formula for
determining when unlawful activity is sufficiently
extensive to be "continuous."
832 F.2d at 40. I would explicitly hold, therefore, that
although the duration of the predicate acts does not without more
show continuity, if the acts occurred (as shown by the number of
acts) or establish a threat of occurring (as shown by also
considering whether they are repetitive in nature) with some
frequency, they satisfy the continuity requirement, and, provided
they are related, a pattern is shown.
"A party alleging a RICO violation may demonstrate
continuity over a closed period by proving a series of related
predicates extending over a substantial period of time." H.J.,
Inc., 492 U.S. at 242, 109 S. Ct. at 2902. What constitutes a
"substantial" period of time for these purposes (as long as in
excess of "a few weeks or months," see infra) should vary with
the number of acts in "the series" of predicates. As the number
of acts in a given period of time increases, the predicates begin
to look less sporadic and a pattern begins to emerge. The only
(relative) absolute here should be that the predicates must
stretch out at least for more than three or four months to
establish closed-ended continuity in light of the Court's
instruction that "[p]redicate acts extending over a few weeks or
months and threatening no future criminal conduct do not satisfy"
the continuity requirement.
Id. at 242, 109 S. Ct. at 2902.
For open-ended continuity, in contrast, we are looking
for "conduct that by its nature projects into the future with a
threat of repetition." Thus, while I agree with Judge Roth that
the two types of continuity are cognate, I believe that to see
whether open-ended continuity is established, what we should ask
is simply whether the activity threatens to demonstrate close-
ended continuity at some future time. This, I believe, is the
point of the three examples of open-ended continuity in the H.J.,
Inc. opinion, including the scenario where the defendant's
commission of predicate acts is "a regular way of conducting
defendant's ongoing legitimate business." 492 U.S. at 242-43,
109 S. Ct. at 2902.
To return to Barticheck factor #6, in my view, threat
of recurrence is also the only respect in which the "character"
of the predicate acts is relevant to the continuity inquiry. As
the Supreme Court and Judge Roth's opinion have explained, open-
ended continuity merely refers to "past conduct that by its
nature projects into the future with a threat of repetition."
Majority Op. at page 31 (quoting H.J., Inc., 492 U.S. at 241, 109
S. Ct. at 2902) (emphasis supplied here). For example, if
extortion is a defendant's regular way of conducting business,
then the nature or character of the conduct in the sense of its
routineness or literal open-endedness makes it likely to continue
into the future. That is the sense in which the character of the
activity is relevant to continuity.26
As Judge Roth's opinion correctly holds, "character of
the unlawful activity" may not refer to some notion of "societal
threat." Lead Op. at page 34 n.17. Because the opinion does not
clarify the extremely limited sense in which "character" of the
26
This interpretation of "character" of the unlawful activity
as "repetitive character" also makes sense of the admonition in
Kehr Packages to consider the underlying scheme in mail fraud
cases. To the extent that the underlying scheme indicates a
likelihood of a defendant's continuing to commit predicate acts,
it may be relevant to open-ended continuity. (Of course, the
underlying scheme also may supply an "organizing principle" that
establishes relatedness. See supra at page 50 (quoting H.J.,
Inc. 492 U.S. at
238, 109 S. Ct. at 2900).) In all cases,
however, we are looking for a pattern (and thus continuity and
relatedness) of the predicate acts of racketeering activity, see
H.J.,
Inc., 492 U.S. at 237-40, 109 S. Ct. at 2900-01;
id. at
242, 109 S. Ct. at 2902.
predicate acts is relevant to the continuity inquiry, the dissent
unfortunately devotes great energy to arguing that the
"character" of the predicate acts, meaning the species of act
involved, weighs against a finding of continuity. See Dissenting
Op. at pages 12-18. I believe that this effort is fundamentally
at odds with the RICO statute and Supreme Court precedent
interpreting it.
B.
The "societal threat" requirement can be traced back to
this court's opinion in the first Marshall-Silver case, 835 F.2d
63 (3d Cir. 1987). There, we reasoned that "the target of RICO
. . . is criminal activity that, because of its organization,
duration, and objectives poses, or during its existence posed, a
threat of a series of injuries over a significant period of
time."
Id. at 66-67 (emphases supplied). The panel dismissed
the case in part because it involved "a single victim, a single
injury, and a single short-lived scheme with only two active
perpetrators,"
id. at 67, and thus did not pose the appropriate
sort of threat. This was an eminently prudent attempt to make
sense of the RICO pattern requirement. It appears to be an
effort to get at the ongoing or potentially ongoing criminal
activity that concerned Congress. It was essentially an extent
requirement.
In the cases after H.J., Inc., however, the concern
over extent of injury was transmogrified to a focus on societal
injury. Rather than worry about a "series of injuries," we have
come to focus on a normative evaluation of the injuries alleged
in a civil RICO case. Such focus is the basis for Judge
Greenberg's dissent in this case, but with all due respect, given
what Congress and the Supreme Court have said about the RICO
statute, see Lead Op. at page 34 n.17, I believe that the focus
is inappropriate in this context.
Congress in the RICO statute specified an extensive
laundry list of serious and arguably less serious acts that all
constitute racketeering activity, and so it strikes me as
improper to maintain that the statute's "pattern" requirement
builds in a normative evaluation of the seriousness of the
predicate acts. The concern about federalizing and attaching
drastic penalties to "garden variety fraud," see Dissenting Op.
at pages 20-21, is a legitimate one, but one that must be
addressed by Congress rather than the courts. And Congress has
told us what sorts of acts to worry about. Our concern with the
pattern requirement is simply to insure that RICO liability is
not attached to "isolated" or "sporadic" predicate acts. That
task requires no inquiry into the seriousness of the acts. The
"threat" for which we are looking is the threat of repeated
prohibited conduct, not the threat of grievous harm.
With this in mind, I believe that this court should
plainly state that the number of victims (factor #4) and number
of perpetrators (factor #5) do not bear on the continuity
inquiry. Certainly, neither the number of victims nor the number
of perpetrators should affect the analysis of duration which, as
the majority explains, the Supreme Court has rendered the
centerpiece of the continuity jurisprudence. Indeed, these
factors seem to inform the notion of societal threat, and hence
are out of bounds.
Nor does the number of victims or perpetrators go to
making out a pattern. For example, one office-tower bomb
triggered during business hours could result in a tragically
large number of victims, but just because the bombing happened
during the day instead of at night when few people were there
does not make it more likely that the bombing reflects non-
isolated or non-sporadic activity. Similarly, three bombings by
several conspirators trying to eliminate one target would not (if
successful) reflect a greater threat of continuing racketeering
activity than would three bombings by the Unabomber, because it
is only the repetitive nature of the activity and not the number
of victims or perpetrators that helps establish a threat of
continuity.
The number of predicate acts could indicate an extent
of activity that would bear on whether the activity is sporadic
or frequent, and extent of the predicate activity is therefore
relevant to continuity, as Judge Roth seems to recognize. See
Lead Op. at page 38 ("[If] the predicate acts have been a regular
way of conducting defendant's legitimate business over a long
period in the past, the RICO pattern been satisfied."). But
number of victims is not relevant, for, under the present
congressional scheme, we are looking for continuity in order to
show a pattern of racketeering acts, not harm from the acts. See
supra page 54 n.26.
C.
We have previously held that "similarity" (factor #3)
does not bear on continuity, see, e.g., Marshall-Silver, 894 F.2d
at 595 n.1, and Judge Roth has already made length of time
(factor #2) and number of unlawful acts (factor #1) part of her
core analysis, irrespective of Barticheck. In my view, the lead
opinion leaves virtually nothing of Barticheck and I believe --
along with Judge Greenberg in dissent, see Dissenting Op. at page
7, especially lines 6-10 -- that we should say so. While I share
Judge Roth's uneasiness as to where this leaves the law, I can
only hope that its eloquent and clarion call will not be ignored
by Congress.
Judges Stapleton and McKee join in this concurrence.
ALITO, Circuit Judge, concurring:
I concur in the judgment, and I join parts I, II, V,
and VI of the opinion of the court While the discussion of the
"continuity" requirement in part IV of Judge Roth's opinion is a
welcome step away from the approach taken in some of this court's
prior decisions, I do not agree with certain portions of that
discussion. I set out my understanding of the concept of
"continuity" in Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d
1406, 1419-26 (3d Cir. 1991) (Alito, J., concurring and
dissenting), and pursuant to that analysis, I think that closed-
ended continuity was sufficiently established here to defeat
summary judgment. My principal points of disagreement with the
discussion in part IV of Judge Roth's opinion are as follows.
First, I do not agree with the intimation (Typescript
at 34) that closed-ended continuity requires activity lasting
years. See Kehr Packages, Inc., 926 F.2d at 1421-22 (Alito, J.,
concurring and dissenting).
Second, I do not agree with the suggestion (Typescript
at 36-37) that a plaintiff who establishes "closed-ended
continuity" may also be required to show that the predicate acts
were part of the defendant's regular way of conducting its
business. I see no support for this requirement in the language
of the RICO statute or relevant Supreme Court decisions.
Third, I do not agree that, in a RICO case based on
mail fraud predicates, we must "focus on the underlying
fraudulent activity, rather that on the otherwise innocent
mailings, in determining continuity." (Typescript at 38.) In my
view, we must focus on the duration of the predicate violations.
See Kehr Packages, Inc., 926 F.2d at 1422-23 (Alito, J.,
concurring and dissenting).
Finally, I do not think that the Barticheck factors
should be considered except to the extent that they have some
logical bearing on "relatedness" or "continuity." See Kehr
Packages, 926 F.2d at 1421 (Alito, J., concurring and
dissenting).
GREENBERG, Circuit Judge, dissenting.
In its amended complaint, the Estate of Charles L.
Tabas seeks to transform its state-law dispute with the
defendants over the proper allocation of a partnership's profits
into a federal RICO case simply by alleging that the defendants
used the United States mail to communicate with it over a
substantial period of time. While we have not considered
directly whether a plaintiff can bring a RICO action in such
circumstances, our precedents clearly forbid such alchemy. See
Hughes v. Consol-Pennsylvania Coal Co., 945 F.2d 594, 609-11 (3d
Cir. 1991), cert. denied,
501 U.S. 1222,
112 S. Ct. 2300 (1992);
Hindes v. Castle,
937 F.2d 868 (3d Cir. 1991); Kehr Packages,
Inc. v. Fidelcor, Inc.,
926 F.2d 1406 (3d Cir.), cert. denied,
111 S. Ct. 2839 (1991); Banks v. Wolk,
918 F.2d 418 (3d Cir.
1990); Marshall-Silver Constr. Co. v. Mendel,
894 F.2d 593 (3d
Cir. 1990); Swistock v. Jones,
884 F.2d 755 (3d Cir. 1989).
Therefore, I would affirm the grant of summary judgment in favor
of the defendants, and I respectfully dissent.27
I agree with the majority that the central issue in
this appeal is whether the Estate has alleged that the defendants
engaged in a "pattern of racketeering activity" as defined in 18
27
The Estate may have valid claims under state law, but I
would hold that the district court did not abuse its discretion
in dismissing these claims pursuant to 28 U.S.C. § 1367.
U.S.C. § 1961(5).28 Majority typescript at 24. As noted by the
majority, to establish a pattern of racketeering activity, a
plaintiff "must show that the racketeering predicates are
related, and that they amount to or pose a threat of continued
criminal activity." H.J. Inc. v. Northwestern Bell Tel. Co., 492
U.S. 229, 239,
109 S. Ct. 2893, 2900 (1989) (emphasis in
original). Thus, a plaintiff seeking to bring a RICO claim must
allege, among other things, relatedness and continuity.
As the majority states, the predicate acts are 41
instances of alleged mail fraud. Of these, 39 were the mailing
of $15,000 checks to the Estate, totalling $585,000, representing
monthly distributions from Tabas Enterprises. The remaining two
were the mailing of yearly tax forms to the Estate. Amended
Complaint ¶ 49, App. at 43-46. According to the amended
complaint, the checks were sent from December 22, 1987, to
February 19, 1991, a period of over three years.29 The Estate
also alleges as predicate acts that the defendants used the
United States mail to send checks to members of Daniel Tabas's
family for work not performed. Amended Complaint ¶ 51, App. at
28
I also agree with the majority that the 1987 settlement and
the subsequent mutual release do not preclude the Estate from
bringing this case. I mention this point because, as the
majority notes, this issue was considered by the panel only and I
was a member of the panel.
29
The amended complaint recites that the last two checks were
sent on January 18, 1990, and February 19, 1990. Amended
Complaint at 34. However, these dates appear to be typographical
errors because they are listed in an otherwise chronological
sequence in which the next preceding date was December 14, 1990.
46-47.30 The majority, however, does not rely on these
allegations as the Estate did not provide evidence that these
checks were mailed, and the evidence on the motion for summary
judgment established that a courier delivered them. I agree with
this disposition and thus conclude that we are concerned only
with the mailing of the $15,000 checks and the tax forms.
I would hold that these mailings are related.31 See
Kehr Packages, 926 F.2d at 1414 (noting that relatedness test
almost always will be satisfied "in cases alleging at least two
acts of mail fraud stemming from the same fraudulent
transaction"). However, in my view these mailings do not satisfy
the continuity requirement as defined by the Supreme Court's and
our precedents. In H.J. Inc., the Supreme Court stated that
continuity "is both a closed- and open-ended concept, referring
either to a closed period of repeated conduct, or to past conduct
that by its nature projects into the future with a threat of
repetition." 492 U.S. at 241, 109 S.Ct. at 2902 (citing
Barticheck v. Fidelity Union Bank/First Nat'l State,
832 F.2d 36,
30
In their brief, the defendants maintain that this
allegation does not satisfy the pleading requirements of Fed. R.
Civ. P. 9(b). Brief at 30 n.6; see Banks v. Wolk, 918 F.2d at
422 n.1 (noting that allegations of mail fraud must be plead with
specificity required by Fed. R. Civ. P. 9(b)). I do not address
this contention because even assuming that the pleading
requirement is met, the allegations were refuted and, in any
event, the Estate's allegations as a whole do not state a claim
under RICO.
31
While the majority does not hold explicitly that they are
related, it implicitly reaches this conclusion.
39 (3d Cir. 1987)). If a plaintiff does not allege that the
predicate acts lasted over a "substantial period of time," then
it must allege a threat of continued criminal activity. Id. at
242, 109 S.Ct. at 2902;
Marshall-Silver, 894 F.2d at 596.
Conversely, if a plaintiff alleges that the predicate acts lasted
a substantial period of time, then it need not allege a threat of
future criminal conduct. Therefore, a plaintiff alleging a
closed-ended scheme has both a lesser burden in that it does not
have to demonstrate a threat of future harm, and a greater burden
in that it must establish that the predicate acts continued over
a substantial period of time.
Although we do not have a bright-line rule establishing
how long the predicate acts must last to constitute a
"substantial period of time," I will assume that the period of
over three years in this case would satisfy any such
definition.32 Yet, simply by clearing this duration hurdle the
Estate does not establish continuity for we have stated clearly
and repeatedly that duration is a necessary but not sufficient
condition to proving continuity. In Hindes v. Castle, for
example, we stated:
The post-H.J. Inc. cases decided by this
court which have focused on pattern all make
clear that duration is the sine qua non of
continuity. While it is not in itself
sufficient to establish a pattern, a
determination that must be made in light of
32
While I treat this case as a closed-ended case, obviously
if I considered it as open-ended my result would be the same.
all of the Barticheck factors, no pattern can
be shown without the required duration.
937 F.2d at 873 (emphasis added). Likewise, in Marshall-Silver
we recognized:
[I]f the Court in H.J. Inc. intended that the
duration of the predicate acts or the threat
arising therefrom should be determinative
. . . we would not have expected the Court to
eschew providing a specific standard in favor
of a fact oriented, case-by-case development.
894 F.2d at 597 (emphasis in original) (dicta); see also Kehr
Packages, 926 F.2d at 1412 (noting that "the length of time over
which the criminal activity occurs or threatens to occur is an
important factor," but not stating that it is dispositive).
Accordingly, a more detailed analysis of the complaint is
required.33
33
Our rule that duration is a necessary but not sufficient
condition to establish continuity is consistent with the Supreme
Court's statement in H.J. Inc.: "petitioners claim that the
racketeering predicates occurred with some frequency over at
least a 6-year period, which may be sufficient to satisfy the
continuity requirement." 492 U.S. at 250, 109 S.Ct. at 2906
(emphasis added). By using the word "may," the Court implicitly
rejected the notion that duration alone establishes continuity.
Precedents in other circuits could be read to suggest
that duration alone can satisfy continuity. See, e.g., Dana
Corp. v. Blue Cross & Blue Shield Mutual, 900 F.2d 882, 886-87
(6th Cir. 1990) (stating that in a single-scheme, single-victim
case "the allegations of fraud occurring for a period of
seventeen years, along with the specific mailings evidencing such
a scheme, are sufficient to state a claim of a pattern of
racketeering activity"); Fleet Credit Corp. v. Sion,
893 F.2d
441, 446-47 (1st Cir. 1990) (finding that 95 fraudulent mailings
sent over a four and one-half year period are sufficient to
establish continuity); Walk v. Baltimore & Ohio & R.,
890 F.2d
688, 690 (4th Cir. 1989) (reversing dismissal where complaint
alleged 10-year scheme to defraud plaintiffs); Jacobson v.
In Barticheck v. Fidelity Union Bank/First Nat'l State,
832 F.2d 36, we set forth six factors that a court should address
in considering whether the plaintiff has alleged a pattern of
racketeering: (1) the number of unlawful acts; (2) the length of
time over which the acts were committed (duration); (3) the
similarity of the acts; (4) the number of the victims; (5) the
number of perpetrators; and (6) the character of the unlawful
activity.
Id. at 39. The majority nevertheless concludes that
having "found a pattern of racketeering activity in both the
duration of and the on-going threat implicit in defendants'
regular way of doing business [it] will not go on to analyze this
case under the six Barticheck factors." Majority typescript at
40. The majority then indicates that its decision not to employ
the Barticheck factors does not mean that they are irrelevant in
determining where there is continuity, as a court may consider
the factors if relatedness and continuity are in doubt.
Cooper,
882 F.2d 717, 720 (2d Cir. 1989) (stating that continuity
existed because predicate acts alleged occurred over "a matter of
years"). However, it is not clear that in any of these cases,
the courts of appeals faced a factual situation analogous to the
one presented here, i.e., a dispute over the profits of a
partnership. This case most similar to this one is Jacobson. In
Jacobson, the plaintiff alleged that the two defendants, one of
which was his son, attempted to defraud him out of real estate
holdings that he owned. While the nature of the dispute is
somewhat similar, the alleged predicate acts went beyond mail
fraud and included extortion, larceny, offering false instruments
for filing, and
usury. 882 F.2d at 719. Thus, the character of
the unlawful activity in Jacobson is vastly different than that
alleged here. In any event, we are not bound by Jacobson.
I reject the majority's approach. To start with,
continuity is in doubt here. But quite aside from that
consideration it seems to me that the majority's approach
inevitably leads to analytical looseness in determining whether
there has been a pattern of racketeering activity. While I do
not doubt that in practice the Barticheck factors cannot be
applied with mathematical precision, at least the factors are
guidelines in determining whether the plaintiff has demonstrated
continuity and relatedness.
The majority opinion would be more justifiable if it
were to say that after H.J., Inc., the earlier explicated
Bartichek factors are no longer relevant in any continuity
analysis. While I would disagree with that holding, such a
result would have some analytical consistency. But by saying the
Bartichek factors are relevant in some cases but not in others,
see majority typescript at 40-41 & n.21, the majority winds up
saying that the Bartichek factors -- which are designed to answer
the broader question of whether particular facts fairly can be
characterized as a RICO case -- may shed light on whether a
three-month long scheme constitutes a pattern of racketeering
activity but not on whether a three-year long scheme constitutes
such a pattern. It seems to me self-evident that there are
three-month long schemes that clearly fall within RICO's purview
and three-year schemes that clearly do not. Thus, if the
Bartichek factors are relevant at all, they are relevant in
shedding light on all cases. The majority's approach to the
complex statute does injustice to the Supreme Court's admonitions
to courts to take a "flexible approach" when interpreting the
"continuity" prong of the statute and to develop the concepts
behind "pattern of racketeering activity" on a case by case
basis. See H.J. Inc., 492 U.S. at 238,
243, 109 S. Ct. at 2900,
2902-03. See also Sedima, S.P.R.L. v. Imrex Co.,
473 U.S. 479,
500,
105 S. Ct. 3275, 3287 (1985) (Congress "and the courts"
should "develop a meaningful concept of 'pattern.'") (emphasis
added).
Of course, as I have indicated, we decided Barticheck
before the Supreme Court's decision in H.J. Inc. Nevertheless,
we have noted in post-H.J. Inc. cases that the Barticheck factors
are still relevant and must be considered "'as they bear upon the
separate questions of continuity and relatedness.'" Hindes, 937
F.2d at 873 (quoting
Banks, 918 F.2d at 423); accord Midwest
Grinding Co., Inc. v. Spitz,
976 F.2d 1016, 1023-25 (7th Cir.
1992) (noting that factors set forth in Morgan v. Bank of
Waukegan,
804 F.2d 970, 975 (7th Cir. 1986), which are similar to
Barticheck factors, apply even after H.J. Inc.). In Marshall-
Silver, we recognized that all of the Barticheck factors except
the third, the similarity of criminal acts, are relevant to the
question of
continuity. 894 F.2d at 595 n.1; see also
Hindes,
937 F.2d at 873 (reaffirming this view). Thus, the question of
continuity is an "'inquiry into the extent of the [defendant's]
racketeering activity,'"
Marshall-Silver, 894 F.2d at 595
(quoting
Barticheck, 822 F.2d at 40), and requires an examination
of the five Barticheck factors relevant to continuity. Moreover,
in applying these factors, we must take a "natural and common
sense approach" to continuity. H.J.
Inc., 492 U.S. at 237, 109
S.Ct. at 2899. In view of these precedents in which so many of
the judges of this court have joined, I am perplexed at the
majority's subordination of Barticheck.
Inasmuch as I would apply Barticheck in this case I
will now make an analysis of the factors it set forth. The first
factor, the number of unlawful acts, might appear to weigh in
favor of continuity as the Estate alleged that the defendants
engaged in over 40 predicate acts. However, as we stated in Kehr
Packages, "the continuity question should not be affected by the
fact that a particular fraudulent scheme involved numerous
otherwise 'innocent' mailings, rather than only a few." 926 F.2d
at 1414. Rather, what needs to be considered is the underlying
scheme: "Although the mailing is the actual criminal act, the
instances of deceit constituting the underlying fraudulent scheme
are more relevant to the continuity analysis." Id.; see also
Midwest Grinding
Co., 976 F.2d at 1024 ("Although the sheer
number of predicate acts might appear at first glance to prove
continuity, when it comes to a pattern premised on acts of mail
or wire fraud, the volume of mailings is not dispositive.").
In this case, the alleged underlying scheme was an
attempt to defraud the Estate out of its rightful share of the
partnership income. Thus, the allegations of fraud relate to a
discrete dispute, rather than to numerous distinct attempts to
defraud. To paraphrase Kehr Packages, "[i]t should not be
relevant . . . that [the defendants] sent [checks] on a monthly
basis, rather than quarterly or yearly." 926 F.2d at 1414.
Thus, "the sizable number of mailings does not show that the
defendants operated a long-term criminal operation." Midwest
Grinding
Co., 976 F.2d at 1025. Accordingly, this factor weighs
against a finding of continuity.
The second factor is duration. As I noted above, the
alleged fraudulent activity lasted for at least three years.
However, the significance of the length of the alleged scheme is
diminished by the nature of the scheme itself. In this regard, I
reiterate that the defendants repeated the same allegedly
fraudulent act over three years. Thus, this is not a case in
which each mailing constituted a new fraudulent act. See Kehr
Packages, 926 F.2d at 1415 (distinguishing Fleet Credit Corp. v.
Sion,
893 F.2d 441 (lst Cir. 1990), because in Fleet Credit "each
mailing constituted a new fraudulent act"). As we noted in
Marshall-Silver:
Where such a fraudulent scheme inflicts or
threatens only a single injury, we continue
to doubt that Congress intended to make the
availability of treble damages and augmented
criminal sanctions dependent solely on
whether the fraudulent scheme is well enough
conceived to enjoy prompt success or requires
pursuit for an extended period of time.
894 F.2d at 597. Therefore, while the second factor, duration,
does weigh in favor of continuity, it is not a heavy weight on
the scale. I will not discuss the third factor, the similarity
of the alleged criminal acts, as that factor concerns
relatedness, which I have found in this case.
The fourth factor, number of victims, weighs against a
finding of continuity for, as the district court correctly
indicated, this is a single-victim case. The Estate disputes
this conclusion, contending that all six of the beneficiaries of
the Estate are victims, including a charitable foundation that
ultimately benefits hundreds, if not thousands, of people. Brief
at 27 n.18. Yet, this argument is supported neither by the case
law nor the amended complaint itself. In Kehr Packages, we
addressed an analogous situation and found that the only victim
of the defendants' alleged criminal activity was the company and
not its shareholders or its guarantors. We reached this
conclusion because "Kehr's individual shareholders and
guarantors, and the holders of pledged collateral, were affected
only indirectly." 926 F.2d at 1418-19; see also
Hughes, 945 F.2d
at 611 (noting that alleged scheme affected single victim,
"albeit a class of victims," in rejecting RICO claim).
Similarly, here the scheme affected the beneficiaries of the
Estate only indirectly.
Additionally, throughout its amended complaint, the
Estate maintains that the fraudulent conduct deprived it, the
Estate, of its rightful share of the income. Indeed, according
to the 1964 Partnership Agreement, the deceased party's share of
the income is payable to his estate, not to his heirs. App. at
155. While it is true that the presence of only one victim, like
the existence of only one scheme, does not necessarily preclude
the finding of a RICO pattern, this fact clearly weighs against
the finding of continuity. See United States Textiles, Inc. v.
Anheuser-Busch Cos., 911 F.2d 1261, 1268 (7th Cir. 1990).
Indeed, when there is only one victim and that victim is engaged
in a business relationship with the defendant, the dispute
between the parties may be nothing more than a civil controversy.
The fifth factor, the number of perpetrators, does
appear to weigh in the Estate's favor. The district court stated
that there was only one perpetrator, "Daniel Tabas or individuals
under his control." Opin. at 8-9. But this conclusion is
inherently contradictory for even if the other perpetrators are
under Daniel's control, they still existed. In fact, the
district court's description could be used to describe an
organized crime family, yet clearly Congress meant RICO to cover
organized crime. Nonetheless, this error is not significant, for
even if the number were as large as the Estate argues, the fact
that more than one person was involved in a scheme to defraud
that lasted a substantial period of time cannot without more
establish continuity. Indeed, in some ways this is the least
important factor. Cf. Wade v. Hopper, 993 F.2d 1246, 1251 (7th
Cir.) (per curiam) (listing factors relevant for continuity
determination similar to those listed in Barticheck but not
including number of perpetrators), cert. denied,
114 S. Ct. 193
(1993); Morgan v. Bank of
Waukegan, 804 F.2d at 975 (listing same
factors in pre-H.J. Inc. case). Thus, this factor does not place
a heavy weight on the continuity side of the scale.
The final factor, the character of the unlawful
activity, is perhaps most important in assuring that RICO is
applied in a manner consistent with congressional intent.
Congress aimed to prevent long-term criminal activity, but not to
federalize every garden-variety claim of fraud. "The concept of
'continuity' plays an important constraining role in the
operation of the RICO statute" by requiring a court to examine
not only the "period of time over which the predicate acts
occurred or . . . during which any threatened criminal activity
would be likely to last," but also the character of the predicate
acts and the extent of the injury generated by the acts.
Marshall-Silver, 894 F.2d at 596-97. In this case the character
of the alleged acts of mail fraud and the confined extent of the
injury weigh heavily against the Estate. "Repeated mailings in
furtherance of a single scheme to inflict one fraudulent injury
may be no indication of the underlying fraud's continuity."
Shields Enters., Inc. v. First Chicago Corp.,
975 F.2d 1290, 1295
(7th Cir. 1992).
As I already have noted, this case evolves from an
ongoing dispute regarding the appropriate split of a
partnership's profits. The allegations of fraud do not pertain
to how Tabas Enterprises conducts its business, but only to its
internal functioning. Moreover, unlike other conduct which can
constitute racketeering activity, such as extortion, robbery, or
murder, there is nothing inherently criminal in mailing a letter
containing a check or a tax form. See 18 U.S.C. § 1961(1).
Indeed, the vast majority of mailings undoubtedly are lawful.
Thus, in this case the mailings could be regarded as racketeering
activity only by reference to matters beyond the letters and
their contents.
The unreasonableness of regarding the mailing of the
thirty-nine $15,000 checks as RICO predicate acts in this case is
demonstrated by considering what would have happened if the
defendants had delivered the checks rather than mailed them. In
that case, they could not have committed mail fraud and the
Estate could not have pleaded a RICO case, as there would have
been no predicate acts on which to base the complaint. Rather
than seeking threefold damages under RICO, 18 U.S.C. § 1964(c),
the Estate would have been limited to a state law claim -- even
though at bottom the unlawful activity in both that hypothetical
case and this case involves conduct of precisely the same
character. I thus ask the following question: is it conceivable
that Congress intended that RICO could be applied to a defendant
who mails substantial payments to the plaintiff, but not to the
same defendant if it delivers the payments?34 The question
answers itself. Thus, the fact that this case involves mail
fraud rather than some other type of fraud is entirely
fortuitous, and that fortuity should not result in a windfall to
the plaintiffs. But by ignoring the Bartichek factors, and
therefore failing to inquire into the character of the unlawful
activity, the majority endorses just that counterintuitive
result.
I recognize that the complaint is rife with contentions
that the defendants' activity defrauded the Estate out of its
fair share of the partnership's income. Yet the Estate does not
allege that the defendants' conduct has ramifications outside the
confines of the immediate dispute regarding the division of the
partnership's profits. Thus, the broader threat is minimal at
most. See Meade v. Meade, 1991 WL 243539, *5 (E.D. Pa. Nov. 18,
1991) ("This is a dispute between a small number of parties, and
34
While the majority answers that Congress did intend to
distinguish between mailings and hand deliveries as the former
but not the latter could be mail fraud, this answer misses my
point. My point is that in considering the character of the
unlawful acts in accordance with the sixth Barticheck factor, the
use of the mails was purely fortuitous in this particular case
and it was the alleged fraud and not how the checks were
delivered which injured the Estate.
neither directly affects nor has wider implications for a large
number of people. Actual and threatened societal injury is
little, if any. Finally, each alleged act of mail and wire fraud
forms part of one, extended scheme, reinforcing the essentially
isolated nature of the alleged racketeering activity."),
reconsideration denied, 1992 WL 6929 (E.D. Pa. 1992), aff'd,
998
F.2d 1004 (3d Cir. 1993) (table); Rumbaugh v. Chandler,
1991 WL
169046, *4 (E.D. Pa. Aug. 27, 1991) (App. at 1893-900) ("This
action does not concern an extensive criminal enterprise whose
long-standing, repeated conduct has caused and will continue to
cause a severe injury to the community. Rather, it is a private
dispute between two ex-partners that has continued over twelve
years in various forms.").
I make one final but critical point with respect to the
character of the unlawful activity in this case. I focus on this
point because I regard the character of the activity as the most
significant Barticheck factor in this case. As the majority
points out, 39 of the predicate acts consist of the mailing of
$15,000 checks to the Estate and the other two concern mailing
tax forms. Reliance on such predicate acts is problematic
because the Estate is pleading in essence that the defendants
committed "mail fraud" by sending it money. I can conceive of
cases in which a defendant's act of sending money may constitute
fraud; perhaps, even, the defendants' activities (as alleged in
this case) theoretically could be prosecuted under the mail fraud
statute,35 although it must be remembered that "not every use of
the mails . . . in connection with a scheme is punishable" as
mail fraud. United States v. Frey, 42 F.3d 795 (3d Cir. 1994),
slip op. at 3 (3d Cir. Dec. 13, 1994). But three undisputed
facts belie the conclusion that this is therefore a RICO case.
First, between March 1983 and September 1986, "Tabas Enterprises
paid for various personal expenses incurred by Harriette [as well
as] Daniel." Majority typescript at 4. Second, "[p]rior to
Charles's death . . . the brothers appeared to have an
arrangement under which Tabas Enterprises paid for many personal
and business expenses." Majority typescript at 4 n.2 (emphasis
added). Finally, as the majority indicates, plaintiffs
acknowledge that as of the time of the state court lawsuit, "they
believed Daniel was taking more than he was entitled to under the
partnership agreement . . . They contend [only] that they did not
know the extent to which they were being short-changed . . . ."
Majority typescript at 5 n.3 (emphasis added).
These facts make difficult to accept the majority's
conclusion that the "mailings [were] 'designed to lull [the
Estate] into a false sense of security, postpone [its] ultimate
complaint to the authorities, and therefore make the apprehension
35
See Schmuck v. United States, 489 U.S. 705, 714-15,
109
S. Ct. 1443, 1450 (1989) ("To the extent that Schmuck would draw
from these previous cases a general rule that routine mailings
that are innocent in themselves cannot supply the mailing element
of the mail fraud offense, he misapprehends this Court's
precedents.").
of the defendants less likely than if no mailings had taken
place.'" Majority typescript at 35 n.18 (citation omitted). In
any event, no matter how the Estate characterizes this case, and
even if there were some fraudulent acts, this suit is first and
last a dispute about how the partnership income should have been
distributed. Seen in this context, the mailing of the checks was
so benign an act that it is a thin foundation on which to build
the continuity element. At bottom, regardless of the pejorative
words which the Estate uses to characterize the defendants'
conduct, this case involves a commercial dispute over a discrete
issue, the amount due to the Estate in its monthly draws. Such a
dispute is simply not a RICO controversy.36
I recognize that the majority has listed numerous
questionable expenses charged against Tabas Enterprises and I
further acknowledge that the defendants may have state law
liability for some of these expenses. But it is important in
considering this case to keep in mind that the incurring of these
expenses is not the predicate criminal conduct charged in this
case. Rather, the predicate acts to establish RICO jurisdiction
are the use of the mails to disburse checks and to distribute
forms. Overall, therefore, after consideration of the character
36
Keeping in mind that this case is really about who gets to
use the partnership income for what purpose, consider what would
have happened if the defendants had paid nothing to the Estate
over the three-year period in which they actually paid $585,000.
The Estate would have gotten nothing and there would not be a
RICO case.
of the unlawful activity, together with the other relevant
Barticheck factors, both qualitatively and quantitatively, I
conclude that the Estate has failed to establish a genuine issue
of material fact over continuity and that this case is yet
another attempt by a plaintiff "to fit a square peg in a round
hole by squeezing garden-variety business disputes into civil
RICO actions." Midwest Grounding Co., 976 F.2d at 1025.
In reaching my conclusions, I have taken particular
note of our opinion in Jordan v. Fox, Rothschild, O'Brien &
Frankel, 20 F.3d 1250 (3d Cir. 1994), which affirmed the district
court's judgment granting certain of the defendants "summary
judgment on the RICO claim against them for failure to show
relatedness and continuity . . . essentially for the reasons
given by the district court."
Id. at 1254. The district court
opinion is reported as Jordan v. Berman,
792 F. Supp. 380 (E.D.
Pa. 1992). Jordan is a complex case involving a controversy
between tenants and a landlord, the details of which I need not
discuss. Germane here is the district court's conclusion that
the plaintiffs had not adduced "evidence from which one could
reasonably find a pattern of racketeering activity under
prevailing case law."
Id. at 388. The district court explained
the basis for its decision as follows:
Few relationships in our society seem to
engender more conflict than that of landlord
and tenant. The aggressive landlord and the
disgruntled tenant have almost become
stereotypical. The instant case involves a
typical landlord-tenant dispute about the
construction of a lease and what sums or
services the respective parties are entitled
to. Permitting trash to accumulate for a
day, disrupting utility service for half a
day and vigorously pursuing a plausible
contract interpretation are generally not the
kind of things from which RICO cases are
made. The actions of defendants and their
agents, however characterized, do not pose
the type of significant societal threat that
RICO was designed to deter or penalize.
Id. (emphasis added). By affirming "essentially for the reasons
given by the district court," we approved the foregoing
statement, even though the case involved the use of the mails and
thus, in theory, could have been a RICO case.
If we substituted the relationship between partners for
the landlord-tenant relationship, the underscored language in the
above quotation would describe this case. Certainly the
partnership relationship, like the landlord-tenant relationship,
is a frequent source of disputes. The dispute in this case, to
quote from and to paraphrase Jordan v. Berman:
involves a typical [partnership] dispute
about the construction of a [partnership
agreement] and what sums . . . the respective
parties are entitled to. . . . The actions
of defendants and their agents, however
characterized, do not pose the type of
significant societal threat that RICO was
designed to deter or penalize.
Thus, this case is no more a RICO case than was Jordan.
In coming to my conclusions I also have found it useful
to consider United States v. Pelullo, 964 F.2d 193 (3d Cir.
1992), a case which the majority cites and on which the Estate
relies. Pelullo is a post-H.J. Inc. case in which we found that
a RICO violation could be proved based on a closed-ended scheme
that lasted 19 months. In Pelullo, the defendant was a chief
executive officer of The Royale Group, Ltd., a publicly held
corporation which through subsidiaries acquired six hotels in
Miami Beach. In June 1984, the hotels obtained a $13.5 million
loan from a subsidiary of American Savings and Loan Association.
Under the terms of the loan, $6.2 million was to be used for
renovation, with American retaining this portion and disbursing
the funds as renovation costs were incurred. To obtain a
disbursement, Royale was required to submit draw requests which
set forth a certified itemization of the costs.
The indictment charged Pelullo with three fraudulent
schemes: (1) defrauding American, Royale, and Royale's
shareholders by submitting false documents in connection with
certain draw requests; (2) defrauding Royale of $114,000 by
diverting cash from one of its subsidiaries to repay a debt
Pelullo owed; and (3) defrauding Royale of approximately $500,000
by diverting money for uses other than for the purposes of the
loans. Accordingly, the alleged number of schemes in Pelullo was
larger than the one scheme alleged here. And while the number of
victims in Pelullo could be characterized as small, the nature of
the unlawful activity had a different ring to it, because in
Pelullo the alleged perpetrator was an officer in a public
company and the main victims (American and Royale) were public
entities. Moreover, the alleged fraud was not confined to
Royale's internal operations, but took place in the context of
its normal external business operations. Thus, even though the
Estate relies on Pelullo, that case involved much more than a
dispute between partners and does not support the Estate's
position. Pelullo nevertheless is instructive to illustrate the
contrast between a real RICO case and the Tabas's dispute.
While I do not suggest that a plaintiff alleging a
single fraudulent scheme injuring a single victim in the context
of a private dispute never can maintain a RICO claim, it would be
unusual for such a case to be covered by RICO, especially where
the alleged predicate acts are mail fraud. In reaching this
conclusion, I am cognizant that "RICO's pattern requirement does
not require the existence of more than one 'scheme,'" Marshall-
Silver, 894 F.2d at 596, and that the Supreme Court has declared
that the RICO statute should be read broadly "to reach both
'legitimate' and 'illegitimate' enterprises," Sedima, S.P.R.L.
v. Imrex Co.,
473 U.S. 479, 499,
105 S. Ct. 3275, 3286 (1985).
Furthermore, I recognize that the Court has noted that civil RICO
appears to be "evolving into something quite different from the
original conception of its enactors," and that this problem is
for Congress, not the courts, to correct.
Id. at 499-500, 105
S.Ct. at 3287. See also NOW v. Scheidler,
114 S. Ct. 798, 806
(1994).
Yet our precedents clearly establish that Congress did
not intend RICO to cover every garden-variety fraud. See
Marshall-Silver, 894 F.2d at 597; accord Midwest Grinding
Co.,
976 F.2d at 1025 ("[I]t is equally evident that RICO has not
federalized every state common-law cause of action available to
remedy business deals gone sour."). Rather, the Supreme Court,
"by refocusing the pattern requirement on the sort of long-term
criminal activity that carries some quantum of threat to
society," Midwest Grinding Co., 976 F.2d at 1025, has attempted
"to prevent RICO from becoming a surrogate for garden-variety
fraud actions properly brought under state law," id, at 1022; see
also
Marshall-Silver, 894 F.2d at 596-97 (noting that continuity
plays an important role in constraining operation of RICO statute
to only those activities which threaten societal injury).
Moreover, the Supreme Court has confined the scope of RICO by
limiting the persons who can be liable under 18 U.S.C. § 1962(c).
See Reves v. Ernst & Young,
113 S. Ct. 1163 (1993).
In my view, the majority's opinion inexorably will
result in federalizing numerous internal business disputes in a
way that Congress never could have intended. The opinion as
applied in this circuit will lead attorneys to repackage as RICO
actions ordinary commercial controversies in which the parties
have communicated by mail or wire. Indeed, it seems obvious that
the principles of this case could be applied to routine
commercial disputes in many situations in which the parties have
been in an ongoing relationship, e.g., partnerships, tenancies,
employer-employee, service contracts, supply contracts, equipment
rentals, brokerage accounts, and others as well. A party in such
a relationship, dissatisfied with the other party's performance,
will be able to establish RICO jurisdiction by alleging fraud and
pointing to the other party's numerous mailings in furtherance of
its understanding of the terms of the relationship. For the
foregoing reasons, I dissent. Chief Judge Sloviter,37 and Judges
Hutchinson, Scirica, Cowen, and Nygaard38 join in this dissent.
37
Judge Sloviter joins with the following statement.
Although I do not agree with every detail of Judge Greenberg's
dissent, I join it because it comes closest to expressing my
frustration that the analytic litany that the courts must now
conduct in civil RICO cases leads to a result, the federalization
of garden variety fraud, that is directly contrary to Congress's
expressed intent.
38
Judge Nygaard joins in the dissent, believing that the
district court properly granted summary judgment in favor of the
defendants. He bases his conclusion that summary judgment was
proper, however, upon plaintiffs' failure to show facts giving
rise to mail fraud under RICO rather than upon a failure to
establish a pattern of racketeering activity. Under Judge
Nygaard's analysis, the mailings here were, as in United States
v. Maze, 414 U.S. 395,
94 S. Ct. 645 (1974), merely post-fraud
means of transmitting matter from one place to another. Judge
Nygaard believes that inasmuch as the fraud "had reached
fruition," at the time of the mailing, it cannot be said that the
mailings in question were for the purpose of executing the
scheme, as required by the statute. Kann v. United States,
323
U.S. 88,
65 S. Ct. 148 (1944). Hence, it was not "an essential
step" in the success of the fraud. Schmuck v. United States,
489
U.S. 705, 714,
109 S. Ct. 1443, 1450 (1989).
