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Petro-Tech Inc. v. Western Co.

argued: January 22, 1987.

PETRO-TECH, INC., ROBERT CHUCKROW, GARY GOLDBERG, STERLING KEYSTONE DEVELOPMENT, INC., S. DAVID FRIEDMAN, MALLORY GROUP & COMPANY, INC., JOHN E. KARPAC, FINANCIAL PROGRAMS, INC., HUMMINGBIRD ASSOCIATES, INC., STERLING KEYSTONE SERVICES, INC., HOWARD L. RAGSDALE, ROCK RIDGE DRILLING ASSOCIATES, NORTHEAST DRILLING ASSOCIATES, L.P., PINE VALLEY DRILLING ASSOCIATES, L.P., G.G.-I DRILLING ASSOCIATES, L.P., MOUNTAIN DRILLING ASSOCIATES, L.P., B.C.-I DRILLING ASSOCIATES, L.P., STERLING KEYSTONE DRILLING ASSOCIATES, 1982-B, STERLING KEYSTONE DRILLING ASSOCIATES, 1982-C, AND CDA DRILLING ASSOCIATES, L.P., APPELLANTS
v.
THE WESTERN COMPANY OF NORTH AMERICA, JOSEPH FARINA, BARRY R. RODKEY, GLEN KONYA, MATT BOESE, FRED E. SCHRIEFER, RICHARD D. ROWELL, MICHAEL W. DORY, AND JOHN DOES NOS. ONE THROUGH TWENTY-FIVE APPELLEES



On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civ. No. 85-308 E.

Author: Becker

Before: SEITZ, BECKER and MANSMANN Circuit Judges.

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal from the dismissal of plaintiffs' complaint in a civil RICO case for failure to state a claim, Fed. R. Civ. P. 12(b)(6), raises important questions concerning the role of aiding and abetting and vicarious liability under the civil RICO statute, 18 U.S.C. §§ 1961 et seq. Defendants seek to justify the complaint's dismissal on several grounds.

We begin by addressing defendants' request that we define a RICO pattern, and that we hold that requirement unmet in this case. Because the complaint alleges so many related RICO predicate acts, however, by so many persons, and affecting so many victims over so protracted a period, we find it unnecessary in this case to define a RICO pattern: under any conceivable definition the requirement is satisfied by the allegations in this case. We therefore reverse the dismissal of Counts I through VI.

We then turn to Western's contention that there cannot be respondeat superior or aiding and abetting liability under RICO, and therefore that it cannot be liable under either of those theories in connection with its employees' alleged RICO violations. We hold that a corporation which is alleged to be RICO enterprise under 18 U.S.C. § 1962(c) cannot be held vicariously liable for RICO violations committed by its employees if the employees are the § 1962(c) persons named in the complaint as having conducted the affairs of the enterprise through a pattern of racketeering activity. We hold further that a - 1962(c) enterprise cannot be liable as an aider and abettor. We therefore affirm the district court's dismissal of Counts XI and XII insofar as they operate in tandem with Count III, which is brought under § 1962(c) and which alleges that Western is a RICO enterprise.

Unless the employer is the § 1962(c) enterprise at the same time as its employees are the § 1962(c) persons, however, vicarious liability may be appropriate. Similarly, so long as the aider and abettor is not alleged to have been a § 1962(c) enterprise, aiding and abetting liability may be invoked. In all other constellations of § 1962(c) enterprises and persons, and under subsection (a) of § 1962, we hold that both of these theories of liability may be appropriate so long as the employer/enterprise actually benefited from the persons' predicate acts. We therefore reverse the dismissal of Counts XI and XII to the extent that they operate in tandem with Counts I, II, IV, V and VI.

Lastly, we hold that the complaint's allegations concerning the liability of defendants Western and Michael Dory are sufficiently particular to satisfy the standards imposed by Rule 9, Fed. R. Civ. P. Therefore, except as noted above, we reverse the complaint's dismissal and remand for further proceedings.

I. Facts and Procedural History

Plaintiff Petro-Tech is an oil and gas drilling and well management company. In two contracts covering different time periods and different wells, Petro-Tech agreed to hire defendant Western, and its subsidiary defendant Western Petroleum Services, to provide "fracing" services at wells Petro-Tech managed for its clients. The wells contain oil-permeated rock, and in "fracing" the wells Western would use water and sand to separate the oil from the rock. Petro-Tech's clients are mostly oil and gas exploration, drilling and well operating syndicates. Nineteen of them are also plaintiffs in this case.

Plaintiffs allege that during the relevant time period the market for the services Western sells was quite competitive. Plaintiffs claim that in over eighty instances defendants (Western and various Western employees) responded to this competition and the low profit margins it caused by billing plaintiffs and other customers for more services than were actually provided, and for materials than were actually used, on the wells Western had agreed to frace.*fn1 Plaintiffs allege that Western used the mails to solicit Petro-Tech's business, and that the solicitations thus sent fraudulently described the services that would be provided. Complaint paras. 35 and 36. Similarly, plaintiffs claim that after work was done fraudulent reports of the services purportedly provided were sent through the mails. Plaintiffs allege that the manager of the Meadville, Pennsylvania, yard, as well as several high ranking Western officers, knew of the challenged practices, that Western defrauded other customers in the same way, and that "defendants' wrongful conduct was deliberate company policy." Complaint para. 43. In civil RICO terms, plaintiffs allege that the defendants conducted the affairs of an enterprise (principally Western, though the complaint also sets out other theories, under which other entities are the enterprise) through a pattern of racketeering activity.

The district court dismissed the complaint on the ground that it alleged only "garden variety" fraud by a legitimate business enterprise, which the district court did not believe RICO capable of reaching.*fn2 But the Supreme Court has squarely rejected reasoning of this kind. The Supreme Court believed that, in passing RICO,

Congress wanted to reach both "legitimate" and "illegitimate" enterprises. United States v. Turkette, [452 U.S. 576, 69 L. Ed. 2d 246, 101 S. Ct. 2524(1981)]. The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences. The fact that § 1964(c) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct is hardly a sufficient reason for assuming that the provision is being misconstrued. . . . "The fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth." Haroco, Inc. v. American National Bank & Trust Co. of Chicago, [747 F.2d 384] at 398 [(7th Cir. 1984)].

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.

Sedima v. Imrex Co.., 473 U.S. 479, 105 S. Ct. 3275 at 3287, 87 L. Ed. 2d 346 (1985). This language forecloses us from upholding the district court's view that "garden variety fraud" is beyond RICO's reach.

Defendants do not attempt to justify the dismissal on this ground. Instead, they defend the district court's result on essentially three other bases. We address each of them in turn.

II. The Scope of RICO and The Definition of "Pattern"

Appellees first defend the dismissal of the complaint by suggesting that we construe RICO's pattern requirement to exclude the kind of fraud the plaintiffs allege here. In Sedima, 105 S. Ct. at 3287 (emphasis added), Justice White noted that

the "extraordinary" uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, the inclusion of wire, mail and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of pattern.

"The definition of a 'pattern of racketeering activity,'" the Court went on to explain,

differs from the other provisions in § 1961 in that it states that a pattern " requires at least two acts of racketeering activity," § 1961(5) (emphasis added), not that it "means" two such acts. The implication is that while two acts are necessary, they may not be sufficient. Indeed, in common parlance two of anything do not generally form a "pattern." The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern. As the Senate Report explained: "The target of [RICO] is thus not sporadic activity. The infiltration of legitimate business normally requires more than one 'racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." S.Rep. No. 91-617, p. 158 (1969) (emphasis added). Similarly, the sponsor of the Senate bill, after quoting this portion of the Report, pointed out to his colleagues that "the term 'pattern' itself requires the showing of a relationship. . . . So, therefore, proof of two acts of racketeering activity, without more, does not establish a patter. . . ." 116 Cong. Rec. 18940 (1970) (statement of Sen. McClellan).

105 S. Ct. at 3285 n. 14. The Court in Sedima held that, in addition to requiring two predicate acts, RICO is violated only if the two acts are related to one another. Id.

Perceiving these comments as an invitation so to narrow the statute, a number of courts have begun to use the pattern requirement to prevent RICO from reaching "legitimate business" perpetrating "garden variety fraud." See Fleet Management Systems v. Archer-Daniels-Midland Co., 627 F. Supp. 550, 555 (C.D. Ill. 1986). Extending that invitation to us, defendants herein argue that Sedima

sent a strong signal to the lower courts to further develop the pattern requirement in such a fashion as to curb the trend of garden variety commercial disputes being dragged before an already burdened federal judiciary because of the love of treble damages, attorneys fees and the settlement leverage to be gained from a RICO charge.

Def. Br. at 30. Whatever the wisdom of defendants' proposed invitation as a policy matter, we decline for three reasons to join this effort.

First, while we are touched by defendants' concern for our workload, we believe that Sedima warns us not to construe RICO in a limited way out of a desire to prevent the statute from reaching people other than organized criminals. In fact, while defendants eschew reliance on the district court's rationale for dismissing the case, defendants' invitation is nothing but a more elaborate presentation of the ideas in Judge Willson's opinion: defendants, like Judge Willson, attempt to distinguish between "RICO fraud" and garden variety fraud, and to limit RICO's reach to the former. We must reject defendants' invitation, therefore, for the same reason that defendants have correctly rejected the rationale in the district court's opinion.

Second, while in the future this Court (and ultimately the Supreme Court) will doubtless be obliged to clarify the meaning of the pattern requirement in light of Sedima, the breadth of the fraud alleged in this complaint satisfies us that, even if all of the tests urged upon us by defendants were applied to this complaint, the complaint would still pass muster. Specifically, the cases defendants urge us to follow have interpreted RICO's "pattern" requirement to mean that, in addition to the requisite number of predicate offenses, a complaint must allege that the predicate offenses form at least two separate but related criminal "schemes," Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir. 1986) "episodes," Allington v. Carpenter, 619 F. Supp. 474 (C.D. Cal. 1985) or "activities." Richter v. Sudman, 634 F. Supp. 234 (S.D.N.Y. 1986); ...


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