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GATTI v. NATIONAL BANK OF THE COMMONWEALTH

September 16, 1988

JOSEPH W. GATTI, SR. and LENA E. GATTI, his wife, Plaintiffs
v.
NATIONAL BANK OF THE COMMONWEALTH, E. JAMES TRIMARCHI, DAVID R. TOMB, JR., PATRICK F. McCARTHY, ROY R. FAIRMAN, JOHNSTON A. GLASS, JEFFREY A. MARTIN, and WILLIAM H. JONES, Defendants



The opinion of the court was delivered by: WEBER

 Plaintiffs' son and daughter-in-law owned and operated a hardware store. Defendant Bank made several loans to the business over the years. In supporting their offspring, plaintiffs executed Guaranty and Suretyship Agreements on some of these loans. When the son and his wife defaulted on the loans, the bank turned to plaintiffs for payment.

 Plaintiffs filed this suit against the bank and a number of its officers, alleging that defendants had conspired to defraud plaintiffs by inducing plaintiffs to execute the guarantees while withholding critical financial information about the son's business. Plaintiffs have asserted three styles of RICO claims: Count I - § 1962(d), Count II - § 1962(a), and Count III - § 1961(1)(D). Plaintiffs also seek to hold the bank liable on a respondeat superior theory (Count IV), obtain punitive damages (Count V), and establish a violation of the Pennsylvania Loan Laws, 41 Pa. Stat. Ann. § 504, (Count VI). Defendants have now moved to dismiss Counts III and VI.

 1. RICO - § 1961(1)(D)

 In Count III plaintiffs allege a RICO violation premised on violations of Pennsylvania Securities Laws. However, defendants argue that RICO claims under § 1961(1)(D) are limited to claims premised on violation of Federal statutes.

 Section 1961(1)(D) reads:

 
"Racketeering activity" means . . . (D) any offense involving fraud connected with a case under title 11 [bankruptcy], fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealing, buying selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States.

 The question here is whether the clause "punishable under any law of the United States" modifies only the immediately preceding clause concerning narcotics offenses, or does it also apply to the earlier clauses concerning bankruptcy fraud and securities fraud? In short, to state a claim must plaintiff allege a "fraud in the sale of securities . . . punishable under any law of the United States"?

 We have not been directed to any published opinions which address this question and we have found none. To our mind, a plain reading of this section indicates that to establish a § 1961(1)(D) claim the underlying offense must be one punishable by federal laws. In this regard the placement of the comma immediately preceding the modifying phrase, and the fact that the three enumerated sources of underlying offenses are each the subject of extensive federal statutory schemes, buttress our reading of this section. Also, we note that several courts appear to have adopted this reading of the statute although not deciding the question explicitly. E.g. Trane Co. v. O'Connor Securities, 718 F.2d 26, 29 (2d Cir. 1983); Sedima v. Imrex Co., 473 U.S. 479, 481-2, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985).

 Simply put, we conclude that to state a claim under § 1961(1)(D) the underlying securities offense must be one punishable by federal law. Plaintiffs' claim is predicated solely on alleged violations of Pennsylvania Securities Laws. Therefore, Count III of plaintiffs' Complaint will be dismissed. *fn1"

 2. Count VI - Pennsylvania Loan Law

 "Residential mortgage" as defined by the Act at all times relevant here is:

 
. . . an obligation to pay a sum of money in an original bona fide principal amount of fifty thousand ($ 50,000) or less, evidenced by a security document and secured by a lien upon real property located within this Commonwealth containing two or fewer residential units or on which two or fewer residential units are to be ...

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