Filed: Nov. 15, 2017
Latest Update: Mar. 03, 2020
Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 16-3664 _ YUCAIPA AMERICAN ALLIANCE FUND I, LP, a Delaware Limited Partnership; YUCAIPA AMERICAN ALLIANCE PARALLEL FUND I, LP, a Delaware Limited Partnership, Appellants v. RICHARD A. EHRLICH; STEPHEN H. DECKOFF; LESLIE A. MEIER; JEFFREY A. SCHAFFER; BDCM OPPORTUNITY FUND II, LP, A Delaware Limited Partnership; BLACK DIAMOND CLO 2005-1 LTD, a Cayman Islands Limited Liability Company; SPECTRUM INVESTMENT PARTNERS, LP, a D
Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 16-3664 _ YUCAIPA AMERICAN ALLIANCE FUND I, LP, a Delaware Limited Partnership; YUCAIPA AMERICAN ALLIANCE PARALLEL FUND I, LP, a Delaware Limited Partnership, Appellants v. RICHARD A. EHRLICH; STEPHEN H. DECKOFF; LESLIE A. MEIER; JEFFREY A. SCHAFFER; BDCM OPPORTUNITY FUND II, LP, A Delaware Limited Partnership; BLACK DIAMOND CLO 2005-1 LTD, a Cayman Islands Limited Liability Company; SPECTRUM INVESTMENT PARTNERS, LP, a De..
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 16-3664
________________
YUCAIPA AMERICAN ALLIANCE FUND I, LP, a Delaware Limited
Partnership; YUCAIPA AMERICAN ALLIANCE PARALLEL FUND I, LP,
a Delaware Limited Partnership,
Appellants
v.
RICHARD A. EHRLICH; STEPHEN H. DECKOFF; LESLIE A. MEIER;
JEFFREY A. SCHAFFER; BDCM OPPORTUNITY FUND II, LP, A Delaware
Limited Partnership; BLACK DIAMOND CLO 2005-1 LTD, a Cayman Islands Limited
Liability Company; SPECTRUM INVESTMENT PARTNERS, LP,
a Delaware Limited Partnership
________________
On Appeal from the United States District Court
for the District of Delaware
(D. Del. No. 1-15-cv-00373)
District Judge: Honorable Sue L. Robinson
________________
Submitted Pursuant to Third Circuit LAR 34.1(a)
April 4, 2017
Before: CHAGARES, SCIRICA, and FISHER, Circuit Judges
(Filed: November 15, 2017)
________________
OPINION*
________________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
SCIRICA, Circuit Judge
This case involves events surrounding the bankruptcies of Allied Systems
Holdings, Inc. and a dispute between hedge funds who hold portions of Allied’s first lien
debt. Plaintiffs are two hedge funds managed by Yucaipa Companies, LLC, (collectively
“Yucaipa”). Defendants are hedge funds managed by Black Diamond and Spectrum
Investment Partners, and their employees (collectively “BD/S”). Yucaipa alleges BD/S
engaged in a conspiracy to induce Yucaipa to take a detrimental position in Allied’s
bankruptcy, resulting in damages in the form of equitable subrogation of Yucaipa’s first
lien debt holdings by the bankruptcy court and resulting legal fees. Yucaipa asserts
claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962,
as well as state law claims for fraud and tortious interference with business relations.
The District Court granted BD/S’s motion to dismiss the RICO claims and
declined to exercise supplemental jurisdiction over the remaining state law claims, and
Yucaipa appealed. We will affirm.
I.
A.
The origins of this case lie in the first bankruptcy of Allied in 2007 in the United
States Bankruptcy Court for the District of Delaware and a tangled web of resulting
litigation. After the bankruptcy, Yucaipa became the majority shareholder of Allied under
the plan of reorganization and controlled the board of directors. To finance the
reorganization and emergence from bankruptcy, in May 2007, Allied borrowed $265
million of first lien debt from numerous lenders pursuant to a credit agreement. BD/S
2
were among the lenders, and held a minority stake in the first lien debt.
The terms of the credit agreement are essential to the present dispute. Under its
terms, a lender or lenders holding 50% or more of the first lien debt can act as “requisite
lenders” who have the authority to declare events of default, demand immediate payment
by Allied of the balance of the loan, or commence foreclosure. As Allied’s majority
equity holder, Yucaipa was expressly forbidden by the terms of the credit agreement from
acting as a requisite lender.
In 2008, Allied defaulted on the first lien debt and stopped making interest
payments. Subsequently, Allied agreed to an amendment of the credit agreement, which
gave Yucaipa the right to purchase first lien debt, but under certain restrictions, which
continued to prevent Yucaipa from serving as the requisite lenders.
In February 2009, ComVest Investment Partners III, L.P., which is not a party to
this suit, became the requisite lenders. Yucaipa negotiated directly with ComVest to
acquire the majority of Allied’s first lien debt. In addition, Yucaipa, as majority equity
holder, caused Allied to enter a purported amendment to the credit agreement, which
would have eliminated the restrictions on Yucaipa’s ownership of Allied’s first lien debt
and allowed Yucaipa to become the requisite lenders. On the same day, Yucaipa declared
itself the requisite lenders under the terms of the original credit agreement.
However, the proposed amendment was not approved by unanimous consent of
the first lien debt lenders, as required by the original credit agreement. In January 2012,
BD/S filed suit against Yucaipa in New York state court and successfully obtained a
declaratory judgment that Yucaipa was not the requisite lenders because the purported
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amendment to the credit agreement was void.
While the New York action was pending, in May 2012, BD/S filed involuntary
petitions for bankruptcy against Allied in the United States Bankruptcy Court for the
District of Delaware. In adversarial proceedings in the bankruptcy court, both Yucaipa
and BD/S claimed to be the requisite lenders under the credit agreement. The bankruptcy
court determined BD/S were the requisite lenders and the District Court affirmed this
determination.
The bankruptcy court supervised an auction of Allied’s remaining assets. Jack
Cooper Holdings Corporation, which is not a party to this suit, purchased the bulk of
Allied’s assets. As the requisite lenders, BD/S submitted a credit bid to purchase the
remainder of Allied’s assets, which was approved by the bankruptcy court.
After the auction, Yucaipa filed suit in Delaware state court against BD/S and
other Allied lenders to challenge the allocation of the remainder of Allied’s assets. The
Delaware court dismissed some of Yucaipa’s claims on collateral estoppel grounds based
on the prior decisions of the bankruptcy court. The remainder of the claims were stayed
pending resolution of the bankruptcy.
Meanwhile, in the bankruptcy action, BD/S, as requisite lenders, sponsored a plan
of reorganization, which was approved by the bankruptcy court. The plan included
prosecution of claims against Yucaipa and its principals for breach of contract and breach
of fiduciary duty, and sought equitable subordination of Yucaipa’s first lien debt
holdings. The bankruptcy action remains pending.
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B.
After the reorganization plan was approved, Yucaipa filed this action in the
District Court for the District of Delaware, alleging violation of the Racketeer Influenced
and Corrupt Organizations Act, 18 U.S.C. § 1962, conspiracy to violate RICO, and state
law claims for fraud and tortious interference with business relations. Yucaipa alleges
BD/S engaged in a scheme in which BD/S encouraged Yucaipa to purchase Allied’s first
lien debt from ComVest, then forced Allied into involuntary bankruptcy, in which BD/S
caused the bankruptcy court to equitably subordinate Yucaipa’s first lien debt holdings in
favor of BD/S’s minority stake in the first lien debt.
Yucaipa alleges the scheme began as early as 2009, when a Spectrum employee
received an email from a third-party which stated “I thought you were going to check out
the ‘equitable subordination’ angle.” In addition, Yucaipa relies on an email from a
Spectrum employee to a Black Diamond employee, which explained that it “looks like
Yucaipa pushed the equity button here . . . you ready to roll.” Yucaipa alleges these
emails demonstrate a scheme, beginning in 2009, to file the involuntary petition for
bankruptcy and result in the equitable subordination of Yucaipa’s first lien debt.
In furtherance of this plan, Yucaipa alleges BD/S encouraged Yucaipa to purchase
as much first lien debt as possible. Black Diamond’s founder and principal met with
Yucaipa’s officers in August 2009, and allegedly provided assurances BD/S would work
with Yucaipa after Yucaipa acquired ComVest’s first lien debt. Yucaipa also relies on an
email from February 2, 2011, in which a Black Diamond partner assured Yucaipa that
“[o]n Allied, the strategy you outlined seemed right and you have our support.”
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In addition, Yucaipa alleges BD/S conspired to prevent Jack Cooper Holdings
from purchasing Allied outright prior to the second bankruptcy, and instead encouraged
the potential purchaser to wait to purchase Allied’s assets following the involuntary
bankruptcy. In support of this allegation, Yucaipa relies on emails between BD/S and
Jack Cooper Holdings in May and December 2011.
Finally, Yucaipa alleges Black Diamond and Spectrum entered a cooperation
agreement in January 2012, prior to the involuntary bankruptcy petition, in which both
companies agreed to offer first refusal and participation rights to each other before
transferring any Allied debt. As part of this agreement, Black Diamond agreed to transfer
$4 million of its first lien debt to Spectrum for the same price Black Diamond originally
paid for the debt, representing a substantial discount from market value. Because
Spectrum already held enough of Allied’s debt prior to the transfer to qualify as a
petitioner for an involuntary bankruptcy, Yucaipa avers this transfer represented a bribe
to encourage Spectrum to support Black Diamond in the resulting bankruptcy.
Yucaipa identifies the following predicate acts in support of its RICO claim:
Yucaipa alleges the January 2012 cooperation agreement and $4 million transfer
of first lien debt from Black Diamond to Spectrum constituted claims trading in
relation to a bankruptcy proceeding in violation of 18 U.S.C. § 152(6).
Yucaipa contends, in May 2012, BD/S lied in the petition for involuntary
bankruptcy, as well as in various affidavits and declarations submitted to the
bankruptcy court, and thus committed false oath and false declarations in relation
to a bankruptcy proceeding in violation of 18 U.S.C. § 152(2)-(3).
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Yucaipa avers that various BD/S statements to the bankruptcy court in May 2012
constituted obstruction of justice in violation of 18 U.S.C. § 1503.
Yucaipa claims several emails sent among BD/S employees constitute wire fraud
in violation of 18 U.S.C. § 1343 because they “facilitated the solicitation of Allied
debtholders to join the involuntary petition and . . . illegal claims trading.”
Specifically, Yucaipa identifies emails from September 16, 2011, October 13,
2011, and March 21, 2012.
Yucaipa alleges Black Diamond’s transfer of claims to Spectrum in May 2012
constituted mail fraud in violation of 18 U.S.C. § 1341.
As noted, Yucaipa seeks damages in the form of lost profits due to the involuntary
bankruptcy and equitable subrogation of its first lien debt holdings, as well as attorneys’
fees and costs associated with the resulting litigation in state and federal courts.
C.
BD/S filed a motion to dismiss in the District Court asserting, inter alia, (1)
Yucaipa’s RICO claims failed because (i) Yucaipa lacked RICO standing and (ii)
Yucaipa had not adequately pled a pattern of racketeering activity, (2) Yucaipa’s claims
were barred by the Noerr-Pennington doctrine, and (3) Yucaipa’s claims were barred by
covenants not to sue contained in the credit agreement.
The District Court granted BD/S’s motion to dismiss the RICO claims, concluding
that Yucaipa lacked RICO standing and had failed to allege a pattern of racketeering
activity, and declined to exercise jurisdiction over the remaining state law tort claims. See
Yucaipa American Alliance Fund I v. Ehrlich, 204 F. Supp. 3d 765 (D. Del. 2016).
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Yucaipa appealed, and argues that the District Court erred in dismissing the RICO
claims.
II.1
A.
Yucaipa argues the District Court erred in concluding it lacked RICO standing.
We disagree, and conclude the District Court correctly determined Yucaipa’s alleged
injuries were not a concrete financial loss and were contingent on the result of the
pending bankruptcy litigation.
RICO provides a civil remedy for “any person injured in his business or property
by reason of a violation of” the substantive provisions of the statute. 18 U.S.C. § 1964(c).
“[T]he injury to business or property element of section 1964(c) can be satisfied by
allegations and proof of actual monetary loss, i.e., an out-of-pocket loss.” Maio v. Aetna,
Inc., 221 F.3d 472, 483 (3d Cir. 2000). An injury that “necessarily is contingent upon the
impact of events in the future which have not yet occurred” will not suffice.
Id. at 495.
Yucaipa alleges two types of injury in this case. First, the loss of value of its first
lien debt due to equitable subrogation in the bankruptcy proceeding, and second,
attorneys’ fees and expenses from the bankruptcy and related litigation. We agree with
the District Court that neither injury will suffice for purposes of conferring standing for
civil RICO liability under section 1964(c).
1
The District Court had jurisdiction under 18 U.S.C. § 1964(c) and 28 U.S.C. §§ 1331
and 1367. We have jurisdiction over the District Court’s final order dismissing all claims
under 28 U.S.C. § 1291. We exercise plenary review of the District Court’s orders
granting a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). In re Ins.
Brokerage Antitrust Litig., 618 F.3d 300, 314 (3d Cir. 2010).
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Yucaipa’s first alleged injury is plainly contingent on the outcome of the pending
bankruptcy proceeding, which is still ongoing. While BD/S has sought equitable
subrogation of Yucaipa’s holdings in the involuntary bankruptcy proceeding, the
bankruptcy court has yet to adjudicate the issue or approve a plan of reorganization.
Accordingly, Yucaipa’s injury is not yet concrete and is conditional on the decisions of
the bankruptcy court, as well as the result of any appeal.
As to Yucaipa’s second alleged injury, we have not previously addressed whether
attorneys’ fees incurred as a result of an alleged RICO violation may alone constitute a
RCIO injury.2 We need not decide that question today, because the District Court
correctly concluded that the attorneys’ fees incurred as a result of the alleged RICO
violations are also contingent on the outcome of pending litigation in the bankruptcy
court.
Yucaipa avers that our precedents require only the fact of injury to satisfy RICO
standing, and not that the amount of loss be quantifiable. We agree. See Maio, 221 F.3d
at 484. But in this case, as the District Court noted, Yucaipa may suffer no injury at all
depending on the outcome of the bankruptcy action. Yucaipa admits that it has sought
reimbursement in the bankruptcy proceeding for attorneys’ fees. In addition, Yucaipa
may prevail in its parallel litigation in the District of Delaware and may recover fees.
Thus, Yucaipa’s claims for attorneys’ fees are contingent on the outcome of all of the
pending litigation and do not establish RICO standing.
2
Other Courts of Appeals have recognized RICO claims for attorneys’ fees, at least
where the fees were incurred in defending against frivolous or fraudulent claims. See
Handeen v. Lemaire,
112 F.3d 1339, 1354 (8th Cir. 1997); Bankers Trust Co. v. Rhoades,
859 F.2d 1096, 1105 (2d Cir. 1988).
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B.
Yucaipa maintains the District Court erred in determining Yucaipa had failed to
allege a pattern of racketeering activity. We disagree, because the District Court correctly
concluded that Yucaipa failed to allege a closed-ended continuity of RICO activity.
To allege a civil violation of RICO, plaintiff must demonstrate defendant engaged
in “a pattern of racketeering activity.” 18 U.S.C. § 1962(c). “[T]o prove a pattern of
racketeering activity a plaintiff . . . must show that the racketeering predicates . . . amount
to or pose a threat of continued criminal activity.” H.J. Inc. v. Northwestern Bell Tel. Co.,
492 U.S. 229, 239 (1989). “‘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.”
Id. at 241.
Yucaipa has abandoned its claims of open-ended continuity and relies only on
allegations of a closed-ended continuity. “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. Predicate acts extending over a few weeks or
months and threatening no future criminal conduct do not satisfy this requirement . . . .”
Id. at 242. We have previously explained “because ‘duration is the sine qua non of
continuity’ in a closed-ended scheme, . . . twelve months [between RICO predicate acts]
is not a substantial period of time.” Hughes v. Consol-Pennsylvania Coal Co.,
945 F.2d
594, 611 (3d Cir. 1991) (quoting Hindes v. Castle,
937 F.2d 868, 873 (3d Cir. 1991)).
The District Court concluded Yucaipa had failed to plead a closed-ended
continuity by looking to the dates of the alleged predicate acts in the complaint. The
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earliest predicate act identified in the complaint was an email sent on September 16,
2011, and the last predicate acts alleged were statements in the involuntary bankruptcy
petition filed in May 2012. The District Court determined the alleged pattern of
racketeering activity lasted only nine months and thus did not satisfy the closed-ended
continuity requirement.
Yucaipa contends the District Court erred in calculating the length of the pattern
of racketeering based on the first alleged predicate act, the email sent on September 16,
2011, which allegedly constituted wire fraud in violation of 18 U.S.C. § 1343. Instead,
Yucaipa argues the closed-ended continuity should be deemed to begin with the 2009
emails from BD/S to Yucaipa because this is when the “underlying scheme” began.
Yucaipa relies on our decision in Tabas v. Tabas, in which we stated “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.’” 47 F.3d 1280,
1294 (3d Cir. 1995) (quoting Kehr Packages, Inc. v. Fidelcor, Inc.,
926 F.2d 1406, 1414
(3d Cir. 1991)). In Tabas, we considered claims arising out of an alleged RICO
conspiracy by a partner in a real estate firm and his business associates to defraud the
estate of a deceased partner through mischaracterizing personal expenses as business
expenses and receiving compensation not authorized by the partnership agreement.
Tabas, 47 F.3d at 1282–85. The alleged predicate acts were instances of mail fraud, but
we explained “[e]ach 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” plaintiffs.
Id. at 1294. We concluded the RICO
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continuity included each of the fraudulent deductions from the assets of the partnership.
Id.
Yucaipa asks us to extend the Tabas holding beyond fraudulent conduct to include
conduct which did not violate any RICO predicate statute, but that allegedly led to losses
due to subsequent RICO predicate acts. The activity prior to the alleged predicate acts
Yucaipa seeks to use to show RICO continuity are emails and statements made by BD/S
to Yucaipa in 2009, which encourage Yucaipa to acquire first lien debt from ComVest.
As Yucaipa acknowledges, BD/S’s actions in 2009 were not themselves RICO predicate
acts. Nor did they serve to advance the alleged goal of the RICO conspiracy—to
equitably subordinate Yucaipa’s first lien debt in an involuntary bankruptcy that had not
yet occurred. These discussions necessarily occurred before Yucaipa even held
significant amounts of first lien debt, and thus cannot have been part of a conspiracy to
equitably subordinate Yucaipa’s first lien debt in favor of BD/S. These discussions are
not comparable to the fraudulent actions of the defendants in Tabas, which caused direct
harm to the plaintiffs, and we decline to extend Tabas to these facts.3 Accordingly, we
agree with the District Court’s determination that Yucaipa failed to plead a closed-ended
continuity based on RICO predicate acts occurring over a nine-month period.
III.
For the foregoing reasons, we will affirm the judgment of the District Court.
3
After dismissing the RICO claims, the District Court declined to exercise supplemental
jurisdiction over the state law tort claims. Yucaipa does not challenge this conclusion on
appeal and we will affirm the dismissal of these claims without prejudice.
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