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Malley-Duff & Associates Inc. v. Crown Life Insurance Co.

May 30, 1986

MALLEY-DUFF & ASSOCIATES, INC., APPELLANT,
v.
CROWN LIFE INSURANCE CO., A CORP., AGENCY HOLDING CORP., AN ILLINOIS CORP., AGENCY HOLDING CORP., AN OHIO CORP., CLARKE BURTON LLOYD, INDIVIDUAL, KERRY PATRICK CRAIG, INDIVIDUAL, DIANE PARIANO, INDIVIDUAL, EHRMAN RATINI OGLEVEE & CRAIG, INC., A PENNSYLVANIA CORPORATION, ROBERT OGLEVEE, INDIVIDUAL



On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 81-439).

Author: Higginbotham

Before: HIGGINBOTHAM, SLOVITER and MANSMANN, Circuit Judges.

A. LEON HIGGINBOTHAM, JR., Circuit Judge.

This is an appeal from a final summary judgment of the district court dismissing the complaint of appellant Malley-Duff & Associates, Inc. ("Malley-Duff"). For the reasons that follow, we will reverse and remand for further proceedings.

I.

Until February 13, 1978, Malley-Duff was an agent of defendant Crown Life Insurance Company ("Crown Life") for a territory surrounding and including Pittsburgh, Pennsylvania. Crown Life required Malley-Duff to represent it exclusively. Malley-Duff alleges that defendants formed an "enterprise," the purpose of which was "to acquire, take over or eliminate various Crown agencies that had lucrative territories in the United States of America," and which did so by "false and fraudulent means and pretenses." The enterprise allegedly acquired Malley-Duff's agency by first imposing, nine months into the fiscal year 1977, a "bogus" production quota that could not be met, and then terminating the agency when it in fact failed to meet the quota. According to the complaint, the enterprise used similar means to acquire Crown Life agencies in Chicago, Peoria, Cleveland, Newark, Hartford, Denver, and elsewhere. It is further alleged that terminated agents were defrauded out of renewal commissions.

In April of 1978, Malley-Duff filed suit (" Malley-Duff I ") against defendants Crown Life, Lloyd, Craig, Agency Holding Company (Illinois), and Agency Holding Company (Ohio), as well as another individual not named in this suit, alleging violations of the federal antitrust laws and conspiracy to tortiously interfere with contract. The case was tried to a jury, but defendants won a directed verdict on the antitrust claims at the close of Malley-Duff's case. Malley-Duff won a verdict of $900,000 on the state conspiracy claim, but the jury concluded in answer to a special interrogatory that there was no tortious interference. On appeal, this court ordered a new trial, holding that there was sufficient evidence of a violation of § 1 of the Sherman Act to present a jury issue, and "that the verdict form answers on the remaining state law claims were inconsistent." Malley-Duff & Associates v. Crown Life Insurance Company, 734 F.2d 133, 136 (3d Cir.), cert. denied, 469 U.S. 1072, 105 S. Ct. 564, 83 L. Ed. 2d 505 (1984).

On March 20, 1981 -- prior to trial of Malley-Duff I -- Malley-Duff filed the instant complaint, alleging causes of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982),*fn1 for conspiracy to interfere with civil rights, 42 U.S.C. § 1985,*fn2 and a pendent state civil conspiracy theory. The RICO claims can be divided into two categories: (1) claims arising out of the allegedly fraudulent termination of the agency;*fn3 and (2) claims arising out of alleged obstructions of justice by defendants in the course of the discovery phase of Malley-Duff I.*fn4 The § 1985 claims were based on the same allegedly obstructive conduct. The civil conspiracy count incorporated allegations involving both the termination and the obstructions of justice.

This case was consolidated with Malley-Duff I on November 2, 1981, but was severed on January 11, 1983, prior to trial. Defendants had filed a motion for summary judgment on July 29, 1982. On March 23, 1984, the district court granted defendants' motion and entered judgment for them on all counts. This appeal followed.*fn5

II.

The district court dismissed Malley-Duff's RICO claims, to the extent they arose out of the allegedly fraudulent termination of its agency, on the ground that they were barred by the applicable statute of limitations. Because federal law does not provide a statute of limitations for civil RICO actions, the district court followed the settled practice of turning to the law of the forum state (in this case Pennsylvania) to "borrow" the limitations period for the state cause of action most closely analogous to Malley-Duff's claims.*fn6 See Board of Regents v. Tomanio, 446 U.S. 478, 483-84, 64 L. Ed. 2d 440, 100 S. Ct. 1790 (1980); Johnson v. Railway Express Agency, 421 U.S. 454, 462-63, 44 L. Ed. 2d 295, 95 S. Ct. 1716 (1975); see generally Note, Limitation Borrowing in Federal Courts, 77 Mich. L. Rev. 1127 (1979). The parties agreed that common law fraud was the state cause most analogous to these claims, but disagreed as to whether a two- or six-year limitations period governed such actions in Pennsylvania.*fn7 The district court held that the two-year statute applied, and that claims filed on March 20, 1981, relating to events that occurred in early 1978,*fn8 were therefore time-barred.

Subsequent to the district court's decision, the Supreme Court of the United States decided Wilson v. Garcia, 471 U.S. 261, 105 S. Ct. 1938, 85 L. Ed. 2d 254 (1985), which established a three-part inquiry*fn9 to guide the selection of the statute of limitations that will govern a federal claim. First, we must determine whether it is state or federal law that controls the characterization of the claim. Second, we must decide whether all claims arising under a particular federal law "should be characterized in the same way, or whether they should be evaluated differently depending upon the varying factual circumstances and legal theories presented in each individual case." Finally, "we must characterize the essence of the claim in the pending case, and decide which state statute provides the most appropriate limiting principle." 105 S. Ct. at 1943. In the subsections that follow we engage in the prescribed inquiry.*fn10 Our function here is to legislate interstitially, and in doing so we are mindful of Justice Holmes' admonition that we are "confined from molar to molecular motions." Southern Pacific Co. v. Jensen, 244 U.S. 205, 221, 37 S. Ct. 524, 61 L. Ed. 1086 (1917) (dissent). We conclude that within each state all civil RICO claims should be characterized uniformly, in accordance with federal law, and that in Pennsylvania the most appropriate limitations period for all civil RICO claims is the six-year residual statute of limitations.

A. Controlling Law

In Wilson v. Garcia, which arose in New Mexico, the question whether state or federal law controlled the characterization of § 1983 claims was critical because the Supreme Court of New Mexico had definitively decided, as a matter of state law, that § 1983 claims should be analogized for limitations purposes to state claims brought under the New Mexico Torts Claim Act. DeVargas v. New Mexico, 97 N.M. 563, 642 P.2d 166 (1982). The United States Supreme Court held that DeVargas was not binding on federal courts. The Court noted that the "characterization of § 1983 for statute of limitations purposes is derived from the elements of the cause of action, and Congress' purpose in providing it. These, of course, are matters of federal law. Since federal law is available to decide the question, the language of [42 U.S.C.] § 1988 directs that the matter of characterization should be treated as a federal question." 105 S. Ct. at 1943. The court found further support in § 1988's*fn11 instruction that state law shall apply "so far as the same is not inconsistent with" federal law, observing that "Congress surely did not intend to assign to state courts and legislatures a conclusive role in the formative function of defining and characterizing the essential elements of a federal cause of action." 105 S. Ct. at 1944. In addition, the Court stated, "[i]n borrowing statutes of limitations for other federal claims, this Court has generally recognized that the problem of characterization 'is ultimately a question of federal law.'" Id. (quoting Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 706, 16 L. Ed. 2d 192, 86 S. Ct. 1107 (1966)) (footnote omitted).

We have found no decisions of the Pennsylvania Supreme Court, or any lower court, purporting to characterize RICO claims under Pennsylvania law for limitations purposes. Nonetheless, if state law were to control the characterization our function would be to predict how the Pennsylvania Supreme Court would act, rather than to apply the principles developed by the U.S. Supreme court in Wilson v. Garcia and other "borrowing" decisions. Thus, we cannot overlook this issue. Fortunately, we believe that resolution is quite clear. Though we cannot rely, as the Court did, on § 1988, we note that its borrowing principles are not unique -- the confluence of the Supremacy Clause and the Rules of Decision Act produce the same result in other cases: "If . . . federal law is both pertinent and valid, it applies because the supremacy clause of the Constitution so commands; if the federal law is impertinent or invalid, state law applies because Congress had so directed." Westen & Lehman, Is There Life for Erie After the Death of Diversity?, 78 Mich. L. Rev. 311, 316 (1980). Moreover, the federal interests in uniformity and having "firmly defined, easily applied rules," emphasized in Wilson v. Garcia, 105 S. Ct. at 1944 (quoting Chardon v. Fumero Soto, 462 U.S. 650, 667, 77 L. Ed. 2d 74, 103 S. Ct. 2611 (1983) (Rehnquist, J., dissenting)) apply with as much force to RICO as to other federal causes, such as § 1983, § 301 of the Labor Management Reporting Act, see Auto Workers, supra, or the federal antitrust laws, see Moviecolor Limited v. Eastman Kodak Co., 288 F.2d 80, 83-84 (2d Cir.), cert. denied, 368 U.S. 821 82 S. Ct. 39, 7 L. Ed. 2d 26 (1961). Wilson v. Garcia, 105 S. Ct. at 1944 n. 19. We conclude that federal law controls characterization of RICO claims for limitations purposes.

B. Uniform or Particularized Characterization?

In characterizing Malley-Duff's termination-related RICO claims as analogous to claims for common law fraud, the parties and the district court have followed the settled borrowing practice within this Circuit of parsing the particular factual allegations and legal theories supporting an individual federal claim, rather than looking to the federally-created cause of action for a broader analogy that could encompass all claims brought thereunder in a given state. In Wilson v. Garcia the Supreme Court adopted the latter approach in the context of § 1983 cases, and we believe that their reasoning suggests that the same approach should be followed with civil RICO.

In Wilson v. Garcia the Court noted that the practice of borrowing state statutes of limitations promotes the policy of repose, but that

when the federal claim differs from the state cause of action in fundamental respects, the State's choice of a specific period of limitation is, at best, only a rough approximation of "the point at which the interests in favor of protecting valid claims are outweighed by the interests in prohibiting the prosecution of stale ones."

105 S. Ct. at 1945 (quoting Johnson v. Railway Express Agency, 421 U.S. at 463-64). Section 1983, the Court stated, "can have no precise counterpart in state law . . . . Any analogies to those causes of action are bound to be imperfect." Id. (footnote omitted).

In this light, practical considerations help to explain why a simple, broad characterization of all § 1983 claims best fits the statute's remedial purpose. The experience of the courts that have predicated their choice of the correct statute of limitations on an analysis of the particular facts of each claim demonstrates that their approach inevitably breeds uncertainty and time-consuming litigation that is foreign to the central purpose of § 1983. Almost every § 1983 claim can be favorably analogized to more than one of the ancient common-law forms of action, each of which may be governed by a different statute of limitations . . . .

105 S. Ct. at 1945-46 (footnote omitted). *fn12 The Court also expressed a concern that the somewhat arbitrary selection of one analogy over another can appear result-oriented, and thereby undermine the appearance of neutral justice. 105 S. Ct. at 1945 n.24. The Court concluded that "the federal interests in uniformity, certainty, and the minimization of unnecessary litigation all support the conclusion that Congress favored this simple approach" of selecting "in each State, the one most appropriate statute of limitations for all § 1983 claims." 105 S. Ct. at 1947.

Civil RICO is as far removed from any traditional state cause of action as is § 1983.*fn13 This is well-illustrated by Durante Brothers and Sons v. Flushing National Bank, 755 F.2d 239 (2d Cir.), cert. denied, 473 U.S. 906, 105 S. Ct. 3530, 87 L. Ed. 2d 654 (1985), where the Court of Appeals rejected the district court's choice of a state statute of limitations for actions to recover an overcharge of interest in a RICO case predicated on collection of an unlawful debt. The court pointed out that this seemingly apt analogy dissolved when the elements of the RICO claim were closely examined:

In the context of the allegations made here, therefore, success on these counts would require proof that, inter alia, (1) there was a RICO enterprise, (2) its activities affected interstate commerce, (3) the individual defendants were employed by or associated with the enterprise, (4) the Bank used, in the operation of the enterprise, income derived from the collection of unlawful debts, and (5) the individual defendants participated in the conduct of affairs of the enterprise through the collection of unlawful debt. 18 U.S.C. § 1962(a) and (c). In addition, to prove that what was collected was an unlawful debt within the meaning of RICO, Durante would have to show that (6) the debt was unenforceable in whole or in part because of state or federal laws relating to usury, (7) the debt was incurred in connection with "the business of lending money . . . at a [usurious] rate," and (8) the usurious rate was at least twice the enforceable rate. Id. § 1961(6). And Durante would have to show that (9) as a result of the above confluence of facts, (10) it was injured in its business or property. Id. § 1964(c).

755 F.2d at 248.

The court went on to state:

The above listing of elements that must be proven in order to establish civil RICO liability for collection of an unlawful debt makes clear that the civil RICO action is not simply an action to recover excessive interest or to enforce a penalty for the overcharge. RICO is concerned with evils far more significant than the simple practice of usury . . . . In contrast, a state law claim . ...


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