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KEYSTONE INS. CO. v. HOUGHTON

April 19, 1988

Keystone Insurance Company
v.
Joseph Houghton, Donna Houghton, John Cassidy, Kathleen Cassidy and Frank Livoy



The opinion of the court was delivered by: NEWCOMER

 Newcomer, United States District Judge.

 Before the commencement of this action, the United States initiated a criminal prosecution against the defendants. The criminal indictment charged the defendants with various acts of mail fraud. Count Sixteen of that indictment charged Joseph Houghton, John Cassidy, and Kathleen Cassidy with mail fraud in connection with a July 6, 1981, letter sent to Keystone. Following a trial before Judge Luongo, the jury found the defendants guilty on this and other counts.

 Defendant Joseph Houghton appealed his conviction. The Third Circuit affirmed. Recently, the Supreme Court denied his request for a writ of certiorari. U.S. v. Houghton, Crim. No. 85-349 (E.D. Pa. 1986), aff'd mem., 829 F.2d 31 (3d Cir. August 10, 1987), cert. denied, 484 U.S. 1060, 108 S. Ct. 1014, 98 L. Ed. 2d 979, 56 U.S.L.W. 3561, 3568 (February 22, 1988).

 This action was tried to the Court. During the one day bench trial plaintiff's counsel introduced into evidence the transcript, various documents, and tape recordings from the criminal trial. *fn1" Plaintiff also presented evidence concerning its damages. Turning to the defendants, the Cassidys also moved into evidence designated portions of the criminal trial transcript. The Cassidys did not dispute that the criminal conviction controlled with respect to the July 6, 1981, mailing. The Houghtons attempted to show that the 1977 accident did, indeed, injure Mrs. Houghton and that various claimed expenses were legitimate. The Houghtons also argued that the statute of limitations bars plaintiff's action. Following the bench trial, I permitted all counsel to submit proposed findings of fact and conclusions of law.

 I have reviewed the considerable body of evidence before me. Following that review and the termination of Joseph Houghton's appeal, I am now prepared to issue my findings of fact and conclusions of law. Since counsel have emphasized various factual issues rather than the applicable requirements and standards, I believe it appropriate to first set forth the legal framework within which this case rests.

 I. DISCUSSION

 Plaintiff bases its first claim on 18 U.S.C. §§ 1962(c) and 1964(c). Complaint at paras. 1, 20, 21. Section 1964(c) provides parties with a civil remedy if they have been injured by a violation of section 1962. Section 1962(c), in turn, prohibits any person from being employed by or associated with an enterprise and conducting or participating in that enterprise's affairs through a pattern of racketeering activity.

 To prevail then under sections 1962(c) and 1964(c), the plaintiff must prove that (i) a person conducted, (ii) an enterprise, (iii) through a pattern, (iv) of racketeering activity, and (v) that the defendant's acts injured the plaintiff. Sedima S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-7, 87 L. Ed. 2d 346, 358-9, 105 S. Ct. 3275 (1985); Town of Kearny v. Hudson Meadows Urban Renewal Corp., 829 F.2d 1263 (3d Cir. 1987) (discussing enterprise, pattern, and injury requirements). Also, the injured party must file the complaint within four years from the date on which the action accrued. Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987) (hereinafter " Malley-Duff "). As the parties have failed to adequately address the parameters of the above requirements and demonstrate the presence or absence of the requirements in the present case, I now turn to review the applicable law.

 A. Standing and Injury.

 A plaintiff has standing under § 1964(c) if the injury flows from the commission of a predicate act; the injury need not result from a pattern of predicate acts. Town of Kearny, 829 F.2d at 1268. To require a plaintiff to have suffered injury from each of the predicate acts would, in the words of the Seventh Circuit, "conflate what must be two separate inquiries: first, was there a pattern of racketeering activity violating RICO, and second, was the plaintiff injured by some or all of the activities comprising the RICO violation?" Marshall & Ilsley Trust Co. v. Pate, 819 F.2d 806, (7th Cir. 1987) (quoted in Town of Kearny, 829 F.2d at 1268). Of course, the plaintiff must also prove that a predicate act or acts were the proximate cause of the injury. Sedima, 473 U.S. at 496-7, 87 L. Ed. 2d. at 359 (referring to Haroco Inc. v. American National Bank & Trust Co. of Chicago, 747 F.2d 384, 398 (7th Cir. 1984), aff'd, 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985); accord In re Gas Reclamation, Inc. Securities Litigation, 663 F. Supp. 1123 (S.D.N.Y. 1987).

 B. Enterprise.

 The person must be either employed by or associated with an enterprise. *fn2" A completely illegal organization, which the Houghton Group is alleged to be, may constitute an enterprise for RICO purposes. U.S. v. Turkette, 452 U.S. 576, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981). In addition, the defendant who is alleged to be the person must be associated with a separate enterprise. B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628, 633-4 (3d Cir. 1984); cf. Town of Kearny, 829 F.2d at 1266; U.S. v. Di Gilio, 667 F. Supp. 191, 194-6 (D.N.J. 1987).

 Following the Turkette decision, courts sought to refine the term "enterprise" so as to prevent its overbroad application. In U.S. v. Riccobene, 709 F.2d 214 (3d Cir.), cert. denied sub nom. Ciancaglini v. U.S., 464 U.S. 849, 78 L. Ed. 2d 145, 104 S. Ct. 157 (1983), the Third Circuit Court of Appeals set forth the criteria to determine whether or not an enterprise exists. Plaintiff must demonstrate to the finder of fact (i) an ongoing organization with some sort of framework for making or carrying out decisions, (ii) that the associates function as a continuous unit performing certain roles to benefit the enterprise, and (iii) that the enterprise has an existence separate and apart from the pattern of racketeering activity in which it engages. The enterprise may make or execute its decisions either through a hierarchical system or consensus. The third requirement does not envision some function wholly unrelated to the racketeering activity; rather, it simply requires that the enterprise have an existence beyond that needed to commit the predicate racketeering acts. Indeed, as the Third Circuit noted, proof that an enterprise oversaw and coordinated the commission of several different predicate acts and other activities would satisfy this separate existence requirement. 709 F.2d at 221-4; accord Seville Indus. Machinery v. Southmost Machinery, 742 F.2d 786, 789-90 (3d Cir. 1984).

 I will now briefly review the oft-discussed pattern of racketeering activity requirement.

 C. Pattern of Racketeering Activity.

 
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 form a pattern."

 Sedima, 473 U.S. at 496 n.14, 87 L. Ed. 2d at 358 n.14 (citation and emphasis omitted).

 In the wake of Sedima, the Third Circuit Court of Appeals has held that there is no rigid rule for determining the presence or absence of a pattern; rather, courts must make a case-by-case analysis. Factors relevant to the case-by-case analysis include, but are not limited to, the number of unlawful acts, the length of time over which the acts were committed, the similarity of the acts, the number of victims, the number of perpetrators, and the character of the unlawful activity. Barticheck v. Fidelity Union Bank, 832 F.2d 36, 39 (3d Cir. 1987); accord Marshall-Silver Construction Co. v. Mendel, 835 F.2d 63, 66 (3d Cir. 1987). As noted above, courts may look beyond the predicate acts which allegedly injured the plaintiff to determine whether or not a pattern existed. Town of Kearny, 824 F.2d at 1268.

 D. When Does a RICO Cause of Action Accrue ?

 A plaintiff must file a civil RICO cause of action within four years from the date that the action accrued. The question which still faces federal courts is: when does a civil RICO cause of action accrue? Malley-Duff, 792 F.2d 341 (3d Cir. 1986), aff'd on different grounds, 483 U.S. 143, 97 L. Ed. 2d 121, 134, 107 S. Ct. 2759 (1987) ("We have no occasion to decide the appropriate time of accrual for a RICO claim."). The Third Circuit has not addressed this question. *fn4" 792 F.2d at 341. Accordingly, a brief review of the evolving case law on this question is appropriate.

 There appear to have been four different answers put forth by various federal courts. I shall refer to them as: (i) the discovery rule; (ii) the Clayton Act rule; (iii) the last predicate act rule; and (iv) the last injury discovery rule.

 Before delving into each rule, I believe it is important to distinguish between two types of RICO cases. One type -- commonly referred to as a "garden variety" claim -- involves a single injury caused by two or more predicate acts. The second type involves multiple injuries caused by multiple predicate acts. As discussed below, I believe that a different accrual rule exists for each type of claim.

 The discovery rule adopts the general federal rule of accrual and simply applies it to civil RICO claims. This rule holds that a civil RICO claim arises whenever the plaintiff knows or should have known of the injury. The Ninth Circuit has followed this rule for approximately four years. That court first faced the issue in Compton v. Ide, 732 F.2d 1429 (9th Cir. 1984). A central issue on appeal was whether a civil RICO cause of action accrues when the plaintiff knows the identity of all the alleged conspirators or when the plaintiff knows or should have known of the alleged injury. The Compton court reasoned that since 18 U.S.C. 1964(c) focused on an injury to one's property or business "as opposed to the existence of a criminal conspiracy . . . the normal federal rule on accrual should apply to civil RICO actions alleging conspiracy." 732 F.2d at 1433; accord Volk v. D.A. Davidson Co., 816 F.2d 1406 (9th Cir. 1987) (following Compton in an action involving securities fraud which caused a single injury to each investor).

 Three other Circuit Courts of Appeals have adopted the discovery rule. Alexander v. Perkin Elmer Corp., 729 F.2d 576 (8th Cir. 1984) (per curiam); Bowling v. Founders Title Co., 773 F.2d 1175, 1178 (11th Cir. 1985) (In a case involving several acts of mail and wire fraud but individual injuries to plaintiff-investors, the Eleventh Circuit rejected the district court's application of last predicate act test and applied the discovery rule as "consistent with our practice in related fraud and securities cases."); Pocahontas Supreme Coal Co. v. Bethlehem Steel Corp., 828 F.2d 211 (4th Cir. 1987) (following Compton without discussion). Various district courts likewise have followed the discovery rule as expressed in Compton. Lawaetz v. Bank of Nova Scotia, 653 F. Supp. 1278, 1292 (D. Virgin Islands 1987); Gonzalez v. Katz, 1987 U.S. Dist. LEXIS 7393, Civ. No. 86-7254, slip op. (E.D. Pa. August 13, 1987). Most of these opinions have not examined alternatives to the discovery rule in the context of multiple RICO injuries or have simply followed the Compton decision.

 Following Malley-Duff the Ninth Circuit reaffirmed Compton. State Farm Mut. Auto. Ins. Co. v. Ammann, 828 F.2d 4 (9th Cir. 1987). The panel's opinion noted that Malley-Duff did not address the question of when a RICO cause of action commences and remanded the case to the district court to reconsider the statute of limitations question in conformity with Malley-Duff and Compton. Writing separately, Judge Kennedy explained how the Compton rule would operate in situations where some injuries were sustained within the limitations period and other injuries were sustained outside of the limitations period. He stated: "the rule is that a cause of action accrues when new overt acts occur within the limitations period, even if a conspiracy was formed and other acts were committed outside the limitations period . . . . A corollary rule is that damages may not be recovered for injuries sustained as a result of acts committed outside the limitations period." Id. at 5 (citations omitted). Nonetheless, Judge Kennedy readily acknowledged that this separate accrual rule had not been adopted by the Supreme Court in Malley-Duff or by the Ninth Circuit.

 The second rule, the Clayton Act rule, has been adopted thus far in only one reported decision. Armbrister v. Roland Intern. Corp., 667 F. Supp. 802 (M.D. Fla. 1987). There, the court's rationale depended heavily on the Supreme Court's decision in Malley-Duff to adopt the Clayton Act limitations period and apply it to RICO; however, the uniqueness of the RICO statute with all its prerequisites and the fact that multiple injuries could result from a single pattern of racketeering activity argue against the incorporation of the Clayton Act accrual rule. *fn5"

 The last predicate act rule holds that limitations period for a RICO claim runs from the date of the last overt act. Under this rule as long as the complaint was filed within four years of the last predicate act, the plaintiff could still recover for injuries caused by other predicate acts which occurred outside the limitations period. See County of Cook v. Berger, 648 F. Supp. 433 (N.D. Ill. 1986) (relying on U.S. v. Field, 432 F. Supp. 55, 59 (S.D.N.Y. 1977), aff'd mem., 578 F.2d 1371 (2d Cir.), cert. dismissed, 439 U.S. 801, 58 L. Ed. 2d 94, 99 S. Ct. 43 (1978)); accord Charter Oak Ins. Co. v. Domberg, 1987 U.S. Dist. LEXIS 7153, Civ. No. 83-4522, slip op. (N.D. Ill. August 3, 1987) (application of last predicate act rule to RICO complaint alleging an insurance fraud). The rationale behind this rule rests on "the federal interest in providing relief to those who are injured by a course of continuous and related conduct[; accordingly] it would be incongruous to bar, on statute of limitations grounds, recovery for predicate acts taking place outside the limitations period and permitting recovery only for those within the limitations period." 648 F. Supp. at 435. Since RICO attacks continuous schemes the limitations period should commence only when the pattern of acts causing the specified injury ceases. Charter Oak Ins., supra.

 In marshalling an argument in support of the last predicate act rule, the court in County of Cook confronted Compton and declined to follow that decision. According to County of Cook, Compton "confuses the injurious RICO violation, a pattern of illegal conduct, with its civil remedy. It is the nature of this prolonged, continuing offense which is the primary determinant of plaintiff's injury and which should govern the initiation of the statute of limitations." Id. at 434 n.1.

 I would submit that the primary determinant of an injury is not the pattern but the specific predicate act or acts which proximately caused it. This conclusion flows from the consideration that under section 1964(c) it is not the pattern itself which is actionable but the injury caused by a predicate act or acts. Town of Kearny, supra; Marshall & Ilsky, supra. To delay the accrual of a claim until the commission of the last predicate act where such predicate act does not injure the plaintiff is to retreat from the focus of section 1964(c).

 The fourth rule, the last injury discovery rule, holds that the limitations period runs from the date that the plaintiff knew or should have known of the last injury caused by a predicate act. Bankers Trust Co. v. Feldesman, 648 F. Supp. 17, 35-6 (S.D.N.Y. 1986), on reargument, 676 F. Supp. 496 (S.D.N.Y. 1987) (application of rule to a third amended complaint); cf. Morey v. Bravo Productions, Inc., Civ. No. 85-10091 slip op. (S.D.N.Y. December 2, 1987) (available on Westlaw) (stating that the general rule as expressed in Compton does not apply in RICO actions where plaintiff suffered multiple injuries and citing to Bankers Trust). In a well-reasoned analysis, the Bankers Trust court submitted that the Compton discovery rule may be inadequate for some RICO claims. *fn6" First, a plaintiff may be injured by a single predicate act before he would have a right to sue under RICO. Under the discovery rule, the cause of action for the injury caused by this first predicate act would accrue as soon as the plaintiff knew or should have known about the injury even if the other injury-causing predicate acts occurred later. Thus, the discovery rule would start the limitations period before the commission of later predicate acts. Yet, until the defendant commits at least a second predicate act, there can be no pattern, no violation of § 1962, and no RICO cause of action. See 18 U.S.C. § 1961(5). A second reason why the discovery rule may not be well suited to some RICO claims is that some claims may involve multiple injuries. These multiple injuries could very well result from a single pattern of racketeering activity. If the pattern continued over a number of years, the plaintiff might very well be unable to recover for the earlier injuries. Bankers Trust noted that federal courts have recognized an exception to the discovery rule -- which usually applies to single injury scenarios -- where the conduct is continuous; accordingly, where a defendant's conduct evidences a continuous practice, the action will be considered timely as long as one of the acts falls within the limitations period. 648 F. Supp. 35-6. To hold otherwise, in the context of multiple-injury RICO claims, would encroach upon and limit a legislatively enacted scheme to provide recovery for racketeering injuries. See 18 U.S.C. §§ 1961(5); 1964(c).

 The last injury discovery rule is most appropriate for determining the accrual of a RICO claim which involves multiple injuries. This is so because a plaintiff cannot sue until the defendant has committed at least two predicate acts and the application of the discovery rule may shut off a remedy for a prior injury resulting from the same pattern of racketeering activity. The application of the last injury discovery rule to multiple injury cases would still permit the application of the general discovery rule to RICO claims involving a single injury arising from two or more predicate acts committed in the same time frame. As this case involves multiple injuries and predicate acts over a period of time, I shall apply the last injury discovery rule to Keystone's RICO claim.

 E. Common Law Fraud.

 Keystone also seeks to recover on the alternate theory of common law fraud. The essential elements of fraud include: (1) a misrepresentation; (2) a fraudulent utterance of the misrepresentation; (3) an intention by the maker that the recipient would be induced to act or rely on the misrepresentation; (4) justifiable reliance; (5) damages suffered as a proximate cause of the recipient's justifiable reliance. Warren Balderston Co. v. Integrity Trust Co., 314 Pa. 58, 170 A. 282 (1934); Delahanty v. First Pennsylvania Bank, N.A., 318 Pa. Super. 90, 464 A.2d 1243 (1983) (citing cases). Pennsylvania's six year statute of limitations controls for the present common law fraud claim as the claim accrued before February, 1983. A.J. Cunningham Packing v. Congress Financial Corp., 792 F.2d 330 (3d Cir. 1986); 42 Pa.C.S.A. §§ 5524(7), 5527 (Purdon Supp. 1987).

 I will now turn to the findings of fact. My findings are based on the entire record. In some instances I have cited to especially pertinent sections of the record.

 II. FINDINGS OF FACT

 A. The Cast of Characters.

 1. Plaintiff Keystone Insurance Company ("Keystone") is a corporation formed and existing under the laws of Pennsylvania and has its principal place of business in Philadelphia, Pennsylvania. Plaintiff issued insurance policies of various sorts to defendants at various times between 1977 and 1984. Edward D'Imperio, 4/10/86, pp. 89-102 and exhibits referred to therein. Mr. D'Imperio works for Keystone as a vice-president in charge of claims administration.

 2. Defendant Joseph Houghton has been married to defendant Donna Livoy-Houghton since March, 1978. His mother Mary Houghton, lived with Joseph Houghton at 3020 Eisenhower Drive, East Norriton Township, Pennsylvania. Patricia Jones, 4/3/86, p. 62.

 3. Defendant Donna Livoy-Houghton, wife of Joseph Houghton, is the daughter of defendant Frank Livoy and the sister of Lynda Livoy. P. Jones, 4/3/86, p. 64. She lived at 3020 Eisenhower Drive in East Norriton since before November 19, 1977. Dean Stewart, 4/9/86, p. 92.

 4. Defendant John Cassidy is a friend of defendant Joseph Houghton. He is married to defendant Kathleen Cassidy. In 1978, they lived at 851 Cedar Court, Bensalem, Pennsylvania. Between 1978 and at least 1981 they lived at 3352 Bryan Court in Bensalem, Pennsylvania. Kathleen Cassidy is a close friend of Donna Houghton's. Judy Kaminsky, 4/4/86, pp. 155-158; Benjamin Zuckerman, 4/15/86, pp. 9-184 to 9-185; D'Imperio 4/10/86, p. 91.

 5. James "Skip" Oliver, Esquire, acted as an attorney for these defendants, for Mary Houghton and for Christine Johannes-Friedrich in connection with claims against various insurance companies, including the plaintiff. Christine Johannes-Friedrich, 4/2/86, pp. 25-28, 85; Thomas Curry, 4/3/86, pp. 169, 182; Government Exhibit 3A, D'Imperio, 4/10/86, p. 93; John Collins, 4/14/86, p. 99; Recorded Conversation, December 6, 1983, Transcript No. 19 -- Albeser, 4/18/86, pp. 5-8 to 5-12.

 6. Philip Pearlstein, D.O., acted as a physician for Joseph Houghton, Donna Livoy-Houghton, and John Cassidy in connection with injuries supposedly sustained in accidents which were the basis of claims against insurance companies, including the plaintiff. Thomas Curry, 4/3/86, pp. 178-79; D'Imperio, 4/10/86, pp. 90, 100; Henry Boettjer, 4/18/86, pp. 12-63.

 7. Dr. J. R. Christy acted as a chiropractor for Joseph Houghton, Donna Livoy-Houghton, and John Cassidy in connection with the injuries supposedly sustained in accidents which were the basis of claims against insurance companies, including the plaintiff. Karen Nephin, 4/3/86, p. 156; Thomas Curry, 4/3/86, pp. 178-9.

 B. The November, 1977, Accident.

 8. On March 3, 1977, Keystone provided Donna Livoy-Houghton with an automobile insurance policy. Government Exhibit 3-M. That policy applied to a 1977 Lincoln Continental, VIN 7Y89A925836, and would cover bodily injury, property damage, uninsured motorist accidents, and no-fault incidents (PIP). The no-fault clause would provide medical coverage, $ 15,000 for ...


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