On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Action No. 89-06219.
Dolores K. Sloviter, Chief Judge,*fn* Scirica and Alito, Circuit Judges. Alito, Circuit Judge, concurring in part and dissenting in part.
This case requires us once again to address the question of what constitutes a "pattern of racketeering activity" under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. §§ 1961-68 (1984 & Supp. 1990). The district court held that plaintiffs did not sufficiently allege such a pattern. We will affirm.
Plaintiffs Kehr Packages, Inc. ("Kehr"), James McMurtrie, Charles McMurtrie, and Emily McMurtrie filed suit against Fidelcor, Inc., Fidelity Bank, N.A. ("Fidelity"), Thomas Donnelly, Neil Cohen, James Noon, and Mario Giannini. The complaint contained both RICO and pendent state law claims arising from an allegedly fraudulent promise to lend money to Kehr. The substantive grounds for the RICO claims were allegations of mail fraud in violation of 18 U.S.C. § 1341. The district court permitted defendants to conduct discovery to determine whether subject matter jurisdiction existed.
Following discovery, defendants filed a motion to dismiss for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b) (1), and a motion for summary judgment. Plaintiffs opposed the motions and filed their own motion for leave to file an amended complaint. The district court granted defendants' motion to dismiss and denied plaintiffs' motion for leave to amend. The court held that plaintiffs had not sufficiently alleged mail fraud, and assuming they had alleged such fraud, the allegations in the complaint did not constitute a "pattern" under RICO. The district court denied plaintiffs' motion for leave to amend on the grounds that the proposed amended complaint would not cure the defects in the original. Plaintiffs now appeal from these rulings.
I. STANDARD AND SCOPE OF REVIEW
Initially, we must decide what legal standard should govern this appeal. Defendants filed a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b) (1). The district court granted this motion because it found the RICO claims in plaintiffs' complaints to be legally insufficient. Thus, although the court denominated its order as one under Rule 12 (b) (1), it appeared to dismiss the complaint under Rule 12(b) (6) for failure to state a claim upon which relief could be granted.
The legal standards governing these two motions are different. A district court can grant a Rule 12 (b) (1) motion to dismiss for lack of subject matter jurisdiction based on the legal insufficiency of a claim. But dismissal is proper only when the claim "clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or . . . is wholly insubstantial and frivolous." Bell v. Hood, 327 U.S. 678, 682, 90 L. Ed. 939, 66 S. Ct. 773 (1946). See also Oneida Indian Nation v. County of Oneida, 414 U.S. 661, 666, 39 L. Ed. 2d 73, 94 S. Ct. 772 (1974) (claim must be "so insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as not to involve a federal controversy"). Ordinarily, a court must assume jurisdiction over a case before deciding legal issues on the merits. Bell, 327 U.S. at 682. A Rule 12 (b) (6) dismissal for failure to state a claim is not subject to the same limitations. The claim need not be wholly insubstantial to be dismissed. As this court has noted, "the threshold to withstand a motion to dismiss under [Rule] 12(b) (1) is thus lower than that required to withstand a Rule 12 (b) (6) motion." Lunderstadt v. Colafella, 885 F.2d 66, 70 (3d Cir. 1989).
In this case, we believe the district court's order should properly have been denominated a dismissal under Rule 12 (b) (6), and we will treat it as such. See Black v. Payne, 591 F.2d 83, 86 n.1 (9th Cir.) (treating dismissal under Rule 12 (b) (1) as one under Rule 12(b) (6)), cert. denied, 444 U.S. 867, 100 S. Ct. 139, 62 L. Ed. 2d 90 (1979); see also Kulick v. Pocono Downs Racing Ass'n, Inc., 816 F.2d 895, 899 (3d Cir. 1987) (considering whether to treat Rule 12 (b) (1) dismissal as one under Rule 12(b) (6), but declining to reach issue). Although the court did not discuss the legal standards under which it decided defendants' motion, it considered only the allegations in the complaints and found them "lacking." The court also denied plaintiffs' motion for leave to amend because "it failed to establish a valid claim under [RICO], and therefore fail[ed] to correct the defects in the original complaint."
A plaintiff may be prejudiced if what is, in essence, a Rule 12 (b) (6) challenge to the complaint is treated as a Rule 12(b) (1) motion. When subject matter jurisdiction is challenged under Rule 12 (b) (1), the plaintiff must bear the burden of persuasion. See Mortensen v. First Fed. Sav. and Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). On the other hand, under Rule 12(b) (6) the defendant has the burden of showing no claim has been stated. In Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980), we found that transforming a 12(b) (1) motion into a 12 (b) (6) motion would "deprive the plaintiffs of the procedural safeguards to which they were entitled." Id. In this case, however, there is no reason not to treat the motion as having been made under Rule 12 (b) (6). In opposing defendants' motion to dismiss, plaintiffs recognized that the motion had been made under Rule 12 (b) (1), but stated that "Plaintiffs are treating the Motion of Defendants entitled a 'Motion to Dismiss' as one filed under Rule 12 (b) (6)." Memorandum of Law in Support of Plaintiffs Answer in Opposition to Defendants' Motion to Dismiss at 15. In this situation, there is no harm in treating the district court's dismissal as having been made under Rule 12 (b) (6). We stress, however, that challenges for failure to state a claim ordinarily should be made under Rule 12 (b) (6). See Bell v. Hood, 327 U.S. 678, 682, 90 L. Ed. 939, 66 S. Ct. 773 (1946).
The district court denied plaintiffs' motion for leave to amend because the proposed amended complaint would also fail to withstand a motion to dismiss. Denials of leave to amend a complaint under Fed. R. Civ. P. 15(a) are reviewed for abuse of discretion. Kiser v. General Elec. Corp., 831 F.2d 423, 426-27 (3d Cir. 1987), cert. denied, 485 U.S. 906, 99 L. Ed. 2d 238, 108 S. Ct. 1078 (1988). However, reversal is proper when the district court bases its denial on an erroneous rule of law. Banks v. Wolk, 918 F.2d 418, 419 (3d Cir. 1990); Centifanti v. Nix, 865 F.2d 1422, 1431 (3d Cir. 1989).
Since plaintiffs sought to amend their complaint to rectify certain defects, the allegations in the proposed amended complaint are the relevant ones for purposes of this appeal. This fact is not of great significance, since the amended complaint adds little additional information to that contained in the original. One difference is that the amended complaint drops Fidelcor, Inc. and Mario Giannini as defendants; thus, we do not consider any allegations against them. Since we have treated the district court's order as a Rule 12 (b) (6) dismissal, we must accept as true all factual allegations in the amended complaint and all reasonable inferences that can be drawn from them. The amended complaint must be construed in the light most favorable to the plaintiffs, and can be dismissed only if the plaintiffs have alleged no set of facts upon which relief could be granted. Banks, 918 F.2d at 419.
This case stems from the leveraged buyout of Kehr by James McMurtrie and Charles McMurtrie. The allegations of the amended complaint are as follows. See Amended Complaint at paras. 15-31. On December 12, 1986, the McMurtries entered into an agreement to purchase Kehr. Fidelity agreed to provide $4,165,000 in financing, secured by the assets and accounts of Kehr, and by real estate owned by Charles McMurtrie and his wife Emily McMurtrie. The terms of the loans ranged from five to seven years. Neil Cohen and James Noon handled this loan package for Fidelity. At that time, Cohen was a commercial loan officer at the bank, and Noon was a vice-president.
The original understanding of the parties was that Fidelity would provide, as part of the total $4,165,000 loan, a credit line of $350,000 to be used as working capital for Kehr. Id. at paras. 17-18. The eventual loan agreement included a $600,000 line of credit to be used as working capital, and to finance closing costs and pay off Kehr's prior debts. However, at the settlement on December 12, James McMurtrie discovered that this line of credit would be insufficient to fund the necessary $350,000 in working capital. During the settlement, Cohen and Noon, on behalf of Fidelity, made an oral commitment to lend an additional $185,000 for working capital. Cohen and Noon knew that Kehr would operate at a deficit during 1987, and that the working capital would be critically important. In reliance on this commitment, the McMurtries closed the deal and began operating Kehr. Id. at para. 31.
Between December, 1986 and August, 1987, Cohen and Noon informed James McMurtrie by telephone "numerous" times that the $185,000 would be available as promised. Id. at para. 32. However, Cohen and Noon had no intention of providing the money, and "made such commitments in order to induce Plaintiffs to complete the settlement and to insure that Defendant Fidelity Bank would be the recipient of large monthly interest payments, profits and collateral." Id. at para. 33. Between December, 1986 and July, 1988, Fidelity mailed Kehr invoices for the loan payments. Apparently, during this period Kehr's financial situation became increasingly precarious.
By August, 1987, Cohen and Noon had left Fidelity. In September, responsibility for the Kehr loan was transferred to Thomas Donnelly, a vice-president of Fidelity. The McMurtries believed Donnelly was a high level management consultant who had lending authority. Id. at para. 41. In reality, he worked in Fidelity's Asset Recovery Group, where he was responsible for protecting and recovering the bank's assets. James McMurtrie repeatedly demanded that Fidelity furnish the additional loan as promised, and Donnelly said that he would "review the credit file and terms and conditions of the loans to determine whether additional funds would be advanced by [Fidelity]." Id. at para. 38. The amended complaint does not allege that Donnelly ever represented that the funds would be provided. In addition, Donnelly told James McMurtrie that he would commission an appraisal of Kehr's assets, and asked McMurtrie to draft a "plan of attack" demonstrating how Kehr's financial situation could be improved. According to the amended complaint, this request was "part of the course of conduct of Mr. Donnelly aimed at misleading Plaintiffs into believing that he would attempt to secure additional working capital." Id. at para. 42. However, Donnelly never intended to do so, and in fact had no lending authority. In December, 1987, Donnelly mailed two loan invoices to Kehr. Id. at para. 45.
In the summer of 1988, the McMurtries found a buyer for Kehr. Fidelity apparently had the contractual right to approve the sale, and Donnelly met with the prospective buyer on July 20, 1988. At this meeting, Donnelly announced that the Kehr loans were in default, and also disclosed that he worked in the Asset Recovery Group. On the same day, Donnelly mailed Kehr a notice of default and confessed judgment against the collateral. The buyer continued with the transaction, but Donnelly and Fidelity "unreasonably delayed" approving the sale, despite knowing that the buyer faced a specific deadline. Id. at para. 54. As a result, the buyer withdrew its offer. In September, 1988, Donnelly ordered Kehr to cease operations and liquidate its assets.
The RICO statute authorizes civil suits by "any person injured in his business or property by reason of a violation of [18 U.S.C. § 1962]." 18 U.S.C. § 1964(c) (1988). Section 1962 contains four separate subsections, each addressing a different problem. Section 1962(a) prohibits "any person who has received any income derived . . . from a pattern of racketeering activity" from using that money to acquire, establish or operate any enterprise that affects interstate commerce. Section 1962(b) prohibits any person from acquiring or maintaining an interest in, or controlling any such enterprise "through a pattern of racketeering activity." Section 1962(c) prohibits any person employed by or associated with an enterprise affecting interstate commerce from "conducting or participating . . . in the conduct of such enterprise's affairs through a pattern of racketeering activity." Finally, section 1962(d) prohibits any person from "conspiring to violate any of the provisions of subsections (a), (b), or (c)."
In this case, the amended complaint alleges violations of §§ 1962(a), (b), (c) and (d). Case law has established separate requirements for certain subsections. Under § 1962(a), a plaintiff must allege injury specifically from the use or investment of income in the named enterprise. Rose v. Bartle, 871 F.2d 331, 357-58 (3d Cir. 1989). But see Busby v. Crown Supply, Inc., 896 F.2d 833, 836-40 (4th Cir. 1990) (rejecting "investment use" rule). Fidelity and its parent companies are the named enterprises in this case. Amended Complaint at para. 61. The injury stems from the allegedly fraudulent activities of Noon, Cohen, and Donnelly, but is not specifically linked to the use or investment of income in any named enterprise. Thus, § 1962(a) cannot be a basis for liability in this case. Similarly, under § 1962(b), a plaintiff must allege a specific nexus between control of a named enterprise and the alleged racketeering activity. Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1168 n.2 (3d Cir. 1989). Since the amended complaint does not allege such a nexus, the § 1962(b) count also must be dismissed.
The § 1962(c) claim is not subject to these nexus limitations, and therefore is a possible basis for liability here. However, while an entity can be both an enterprise and a defendant for purposes of § 1962(a), such a dual role is impermissible in actions based on § 1962(c). See Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1990). Fidelity is named as both a defendant and an enterprise. Since § 1962(c) is the only available basis for liability, Fidelity must be dismissed as a RICO defendant. Because Fidelity cannot be a RICO defendant, it cannot be held liable under a respondeat superior theory for the RICO violations of its employees. See Petro-Tech, Inc. v. Western Co. of North America, 824 F.2d 1349, 1359 (3d Cir. 1987). We will consider separately the allegations against each individual defendant under § 1962(c).*fn1
IV. THE "PATTERN" REQUIREMENT
A "pattern of racketeering activity" requires commission of at least two predicate offenses on a specified list. 18 U.S.C.A. §§ 1961(1), (5) (1984 & Supp. 1990). The predicate acts alleged in this case are instances of mail fraud in violation of 18 U.S.C. § 1341. But a pattern requires more than commission of the requisite number of predicate acts. In H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989), the Supreme Court stressed that a plaintiff must show also "that the racketeering acts are related, and that they amount to or pose a threat of continued criminal activity." Id.,109 S. Ct. at 2900 (emphasis in original).
In H.J. Inc., customers of a telephone company alleged that the company had been bribing state regulatory officials to gain approval for excessive telephone rates. This alleged bribery occurred over a six-year period and consisted of cash and in-kind payments, and negotiations for future employment with the company. Id., 109 S. ...