Section 1962," within the meaning of Section 1964(c).
The position taken, however, by the defendant is that the loss which arises from the pattern of racketeering activity, in this instance mail or Wire Fraud, is not the loss which can trigger civil liability under section 1964(c). What Section 1962(a) makes unlawful, so it is contended, is not the predicate activity, the pattern of racketeering activity, but the "investment" or use of the proceeds in the acquisition of an interest in an enterprise or in its establishment or operation. Further, the argument runs, the injury of which the plaintiff has complained must flow from that investment or use -- to use the two statutory words -- in the enterprise of the unlawfully-derived income. That the defendant is right in its statutory analysis is clear from the decision of the Court of Appeals for this Circuit in Rose v. Bartle, 871 F.2d 331 (3rd Cir. 1989), a decision announced on March 20, 1989, somewhat over two months after the filing of the Complaint in this case. The Appellate Opinion sustained the position to that effect taken by my colleague Judge Giles in the District Court, Rose v. Bartle, 692 F. Supp. 521 (E.D.Pa. 1988), in an Opinion announced in July of 1988.
Judge Giles and the Court of Appeals relied on the decision of Chief Judge Fullam in Gilbert v. Prudential-Bache Securities, Inc., 643 F. Supp. 107 (E.D.Pa. 1986), among other cases.
What Judge Giles said, after having noted that § 1962(a) requires a showing of (1) receipt of money from a pattern of racketeering, (2) investment of the money in an enterprise, and (3) that the enterprise was engaged in commerce, was that "In addition, plaintiff must show that he was injured by defendant's investment of money into the enterprise and not simply by the pattern of racketeering activity." Rose v. Bartle, 692 F. Supp. at 533.
As counsel for the plaintiffs and the defendant recognize, this position was sustained by the Opinion written by Judge Greenberg for the Third Circuit in March. Judge Greenberg, after noting that there was authority on both sides of the issue, stated: "The majority of Courts that have addressed the issue have come to the same conclusion as the District Court." After citing further cases, he said: "Requiring the allegation of income use or investment injury "is consistent with both the literal language and the fair import of the language [of Section 1962(a)]." Id. at 357, quoting P.M.F. Services, Inc. v. Grady, 681 F. Supp. 549, 555-56 (N.D.Ill. 1988).
The plaintiff contends that Count One is proper both as a matter of pleading and as a matter of theory. Plaintiff notes that Paragraph 16 precisely alleges that plaintiff and each member of the class has been injured in their business and property by reason of defendant's violation of 18 U.S.C. Section 1962(a), and in brief and in argument plaintiffs contend that it is not the dollar loss generated by the Mail or Wire Fraud which is the besetting injury that brings civil liability into play, but it is the investment by Alamo of its illegal gains back into Alamo as the enterprise that triggers injury. The theory here is that, by putting ill-gotten gains back into the enterprise, Alamo strengthens and perpetuates the fraudulent scheme and facilitates its reoccurrence.
The plaintiff here puts heavy reliance on a decision of February of 1988 by Judge Mencer in the Western District of Pennsylvania, Blue Cross of Western Pennsylvania v. Nardone, 680 F. Supp. 195 (W.D.Pa. 1988). There, Judge Mencer did conclude that Blue Cross stated a valid 1962(a) claim against Nardone in alleging a pattern of fraudulent submission of false prescriptions through the mechanism of Mr. Nardone's pharmacy, the pharmacy being the enterprise back into which Mr. Nardone was alleged to have poured at least some part of the proceeds of his scheme. Judge Mencer concluded, in reliance on a Middle District case, Roche v. E.F. Hutton & Co., Inc., 658 F. Supp. 315, that it was a scenario in which, as in Hutton, the Court held that the investment did cause an injury because money that enabled the business to continue operating also enabled the defendant to perpetrate the fraud." Blue Cross, 680 F. Supp. at 198.
That perception of the scenario is, in plaintiffs' view, particularly relevant here because this is at least contemplated as being a Class Action, and so, in plaintiffs' view, each enhancement of Alamo by reinvestment of the proceeds of one fraud strengthens Alamo in perpetrating the next fraud on the same or another Class Member.
The theory of Blue Cross apparently is that "the proper distinction to draw in determining the causal relationship between the investment of proceeds and the injury to plaintiff is whether the plaintiff was injured by the operation of the company in which the defendant invested the proceeds." Blue Cross, 680 F. Supp. at 197.
In drawing that distinction, the " Blue Cross Court" distinguished Judge Fullam's decision in Gilbert v. Prudential-Bache as one in which, so Judge Mencer concluded: "The defendants invested the proceeds of their scheme in stock of other companies, not their own firm." Blue Cross, 680 F. Supp. at a97.
My reading of Gilbert does not confirm, though it does not preclude--that scenario. Suffice it to say that I find nothing in Judge Fullam's Opinion which rests on such a distinction.
In any event, I conclude that Blue Cross -- which antedates chronologically not only the Court of Appeals' Opinion in Rose v. Bartle but Judge Giles' decision in the District Court -- is simply out of line with, and purports to elaborate a ramification of distinction that is not borne out by, the authoritative determination by the Court of Appeals in Rose v. Bartle.
In this connection, I would refer to Judge Ludwig's discussion of the cases, including Blue Cross, in his quite recent Opinion in Blue Line Coal Company v. Equibank, Civil Action No. 87-6150, ( June 9, 1989, 1989 U.S. Dist. LEXIS 6558, 4-5).
Accordingly, notwithstanding that Paragraph 16 makes the conclusory recital that plaintiff and each member of the class has been injured in their business and property by defendant's violation of 18 U.S.C. § 1962(a), I am not satisfied that the complaint in Count One spells out any injury to any of the named plaintiffs or other putative class members, apart from the particular injury that flowed from the predicate acts of the pattern of racketeering injury.
Since I find in this complaint no sufficient allegation of injury, I conclude that Count One cannot stand.
COUNT TWO -- 1962(c)
Count Two is based on Section 1962(c) which states:
"It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity."
Id. The framework of the claim under Section 1962(c) differs from that under 1962(a), not only in its statutory elements, but in, with respect to this complaint, the identification of the roles played by particular actors. In 1962(c), it is not alleged that Alamo is the enterprise, nor could such an allegation stand under 1962(c). The law is clear, certainly in this circuit, that there cannot be an identity or a person and enterprise under 1962(c).
The theory of the 1962(c) claim in this complaint is that as explained in Paragraphs 18, 19, and 20 of the Complaint, the fraudulent activities attributed to Alamo -- that is to say, the pattern of racketeering activity -- are facilitated by the credit mechanisms utilized by the plaintiffs and the defendant.
Paragraph 18 refers to "The utilization by plaintiff and other class members of "credit facilities such as, American Express, VISA and Mastercard, maintained by a variety of banks and other financial institutions in connection with their rental of motor vehicles from defendant." Further, we learn from Paragraph 19 that "Defendant tendered invoices or other demands for payment to plaintiff and other members of the class. These demands for payment were tendered either individually, or, in those instances where the rental was made by credit card, were incorporated as part of the bill sent by the bank or other financial institution operating the credit card facility." In Paragraph 20, it is alleged that all of the various financial institutions referred to in Paragraphs 18 and 19 were "enterprises" for purposes of the 1962(c) Count.
On argument today plaintiff has narrowed its position. Plaintiff no longer contends that the banks on which class members would draw checks in payment for their automobile rentals were enterprises. The claim as I now understand it is simply that it is sufficient that the credit instrumentalities utilized by the defendant in collecting its rental fees were enterprises for 1962(c) purposes. This would include American Express, Mastercard, VISA and other credit networks which are established by the banking community, and it would also include the banks utilized by Alamo itself as the conduits for processing such invoices as would be generated in the processing of the rental agreements which were themselves the product of the alleged pattern of racketeering activity.
As I understand it, in narrowing the definition of "enterprises" for purposes of Count Two, plaintiffs have not disavowed the contention that these other financial institutions might be characterized as "enterprises," but plaintiffs do recognize that they lie in an outer circle rather than an inner circle of concentric circles of entities that have some bearing on the extension of credit and the consummation of the credit transactions generated by the fraud.
Both parties have regarded as authoritative, with respect to 1962(c), the language of the Third Circuit in United States v. Provenzano, 688 F.2d 194 (3d Cir. 1982), a criminal prosecution under 1962(c). The Third Circuit there quoted and expressed its approval of language used by the Second Circuit in United States v. Scotto, 641 F.2d 47, 54 (2d Cir. 1980). The language of the Third Circuit in Provenzano runs as follows:
"The Court of Appeals for the Second Circuit held that one conducts the activities of an enterprise through a pattern of racketeering when: "(1) one is enabled to commit the predicate offenses solely by virtue of his position in the enterprise or involvement in or control over the affairs of the enterprise; or, (2) the predicate offenses are related to the activities of that enterprise."
688 F.2d at 200. Having quoted the Second Circuit in those terms, the Third Circuit went on to say "It is only when the predicate acts are unrelated to the enterprise or the actor's association with it that the nexus element is missing, and consequently there is no RICO violation."
Though both sides recognize the authoritativeness of the quotation from Scotto, plaintiff puts particular reliance on the immediately subsequent sentence of the Third Circuit, which I have just quoted. Defendant, for its part, notes the discussion on the same page of a Fourth Circuit Opinion
of which the Third Circuit approved. Referring to a Fourth Circuit case, the Third Circuit stated: "the panel later modified its original opinion, however, finding instead that the proper question should have been whether the affairs of the enterprise 'were conducted through the pattern of racketeering activity, not whether they were benefited or advanced or whether profit to the [enterprise] resulted.'" 688 F.2d at 200.
The question arising under Count Two of the present Complaint is whether, taking the more restricted concept of "enterprise" which plaintiff now relies on as distinct from the more elastic concept embraced by the language of Count Two as written, it can be said that Alamo has, within the meaning of 1962(c), put itself in the position that the statute defines, namely: "It shall be unlawful for any person employed by or associated with any enterprise engaged in or the activities of which affect interstate or foreign commerce to conduct or participate directly or indirectly in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt."
The plaintiffs do not, as I understand it, contend that Alamo is, in any sense understood by the statute, employed by American Express, Mastercard or VISA, or by any of Alamo's own banks. The statutory claim rather is that Alamo is associated with the enterprises and has participated directly or indirectly in the conduct of such enterprises' affairs through a pattern of racketeering activity.
The question, to put it in Provenzano terms, is whether it can fairly be said that "the predicate offenses are related to the activities of that enterprise," that being the Scotto language, or whether, in Judge Weis' further language, this be a case in which "the predicate acts are unrelated to the enterprise or the actor's association with it."
The relationship here in a certain sense seems plausible. That is to say, there is the chronological relationship: the allegation is that subsequent to the commission of the alleged fraud -- the creation of the rental relationship by deceptive practices which understate the amount of the ultimate rent -- the plaintiffs become indebted to Alamo, and the banking system, involving both plaintiffs' credit cards and defendant's banks, is utilized to secure a payment to Alamo for the indebtedness.
Now, can that be characterized as "relationship" in the sense contemplated by the statute? The "relationship" in the sense contemplated by the statute is "to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity."
What I find unpersuasive is the contention that the affairs of American Express or a similar instrumentality are conducted "through a pattern of racketeering activity."
What I find is a chronological sequence, but not a situation in which the affairs of American Express or one of Alamo's banks werr themselves participated in or conducted by Alamo through Alamo's chronologically antecedent and completed fraud.
The distinction is, for me, illustrated by a case which seems to me cognate with, albeit not congruent to, the one we have here -- I have in mind the Third Circuit's discussion in Averbach v. Rival Manufacturing Company, 809 F.2d 1016 (3d Cir. 1987) of the 1962(c) claim in that case. Averbach is, of course, a case that follows after the Court of Appeals' decision in Provenzano. In Averbach, 809 F.2d 1016 at 1018, Chief Judge Gibbons said:
"In Count One, Averbach alleges that by serving through the mails its false answers to interrogatories, Rival Manufacturing Company engaged in a pattern of racketeering activity, thereby corrupting an enterprise, United States District Court for the Eastern District of Pennsylvania. The theory of the Complaint is that the District Court is an enterprise and that Rival Manufacturing Company, by serving the false answers to interrogatories, participated in the conduct of that enterprise's affairs, all within the meaning of 18 U.S.C. Section 1962(c) (1982).
We agree that a Court may be an enterprise under the meaning of RICO. "In those cases in which Courts have been recognized as RICO enterprises, however, the participants engaged in patterns of activities designed to corrupt the operation of the Court's own processes. Whereas litigants before courts call on the courts to exercise the judicial process, they do not participate in it in the sense intended by Congress in 18 U.S.C. Section 1962(c) (1982). Such litigants do not share with the Court's personnel a common purpose with respect to the activity complained of."