May 6, 2004

Steven P. Garmisa
Hoey & Farina Attorney

Evidence of an alleged bait-and-switch scheme by a moving company was strong enough to smash a motion for summary judgment in a civil racketeering case. Chen v. Mayflower Transit, Inc., 2004 WL 532373 (N.D. Ill., March 12).

Mark this opinion as a strong start for researching the merits of a potential claim under the Racketeer Influenced and Corrupt Organizations Act.

Angie Chen filed a complaint alleging that Mayflower Transit Inc. violated the RICO act, 18 U.S.C. [sec][sec]1962 (c) (d), when she moved from Atlanta to Chicago.

Responding to Mayflower's motion for summary judgment, Chen presented evidence that she and a number of other Mayflower customers were victimized by an alleged bait-and-switch scheme. According to Chen, she received written and oral promises from Admiral Moving (a Mayflower affiliate in Atlanta) that the cost of moving her possessions was "guaranteed not to exceed $1,741.89, but Century Moving (Mayflower's Chicago affiliate) demanded $2,500 in cash, or a cash equivalent, supposedly because of a "long carry" and the size of the elevator at the destination.

Chen says she was tricked into thinking there would be no additional charges in Chicago because before she received the written estimate from Admiral the only questions she was asked about the destination were whether the apartment building had an elevator and whether the truck would be able to park near the entrance. And Chen says she didn't have cash on hand for payment because she interpreted a letter from Admiral as permitting her to pay by credit card.

As Chen scrambled to raise enough cash, the demands and threats from Century kept increasing. Chen, who started tape recording conversations with Century and Mayflower, was told the price would nearly double if her possessions were placed in storage.
Unable to raise the cash that Century demanded, Chen's property was placed in storage.

Moving for summary judgment, Mayflower argued that its tariff authorized the conduct of its affiliates and that Chen's evidence, including similar complaints by other customers, was insufficient to prove a RICO violation.

Providing a comprehensive review of a complicated area of law, U.S. Magistrate Judge Geraldine Soat Brown denied Mayflower's motion.

RICO 'Enterprises'

Here are some highlights of Brown's opinion (with various omissions not noted in the quoted text).

"To state a claim under section 1962(c), a RICO plaintiff must show the (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.

"Liability under RICO depends upon a showing that two distinct entities exist: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name.

"In Fitzgerald v. Chrysler Corp., 116 F.3d 225 (7th Cir. 1997), the [7th U.S. Circuit Court of Appeals] affirmed the dismissal of the plaintiff's RICO claim based on its finding that the agents' role in the defendant's illegal acts was entirely incidental and thus there was no enterprise.

"Specifically, the court concluded: '[W]here a large, reputable manufacturer deals with its dealers and other agents in the ordinary way, so that their role in the manufacturer's illegal acts is entirely incidental, differing not at all from what it would be if these agents were the employees of a totally integrated enterprise, the manufacturer plus its dealers and other agents (or any subset of the members of the corporate family) do not constitute an enterprise within the meaning of the statute.'

"The court further indicated that the defendant-person (Chrysler) had not been 'empowered to perpetrate warranty fraud by selling through dealers rather than directly to the public.'

"However, in Fitzgerald, the court held open the possibility that a corporation and its agents or affiliates could constitute a RICO enterprise: 'Maybe a manufacturer could use its dealers or other agents or affiliates in such a way as to bring about the sort of abuse at which RICO is aimed, in which event it might be possible to characterize the assemblage as a RICO enterprise.'

"Thus, the fact that the local moving companies may be deemed 'agents' or 'affiliates' of Mayflower does not by itself preclude Chen from establishing her RICO claim.

"In determining whether the distinctiveness requirement is met, the court noted in Fitzgerald that it was helpful to consider the 'family resemblance' between the case at hand and 'the prototype situation to which the [RICO] statute is addressed.'

"The 7th Circuit has described the 'prototypical RICO case' as one in which a criminal 'seizes control of a previously legitimate firm and uses the firm's resources, contacts, facilities and appearance of legitimacy to perpetrate more, and less easily discovered, criminal acts than he could do in his own person....'

"The 7th Circuit recognized, however, that when an enterprise is used to engage in some criminal activity but, for the most part, conducts normal and lawful business, it is only one step away from the prototypical case. Presumably, such an enterprise is within the family resemblance test.

"In Cedric Kushner [Ltd. v. King, 533 U.S. 158 (2001)], which was decided several years after Fitzgerald, the Supreme Court held that an individual and his wholly owned corporation could be sufficiently distinct for RICO purposes. The court in Cedric Kushner concluded that the corporate owner/employee was distinct from his corporation because the corporation was 'a legally different entity with different rights and responsibilities due to its different legal status,' and the court could 'find nothing in the statute that requires more "separateness" than that.'

"The court observed that, 'After all, incorporation's basic purpose is to create a distinct legal entity, with legal rights, obligations, powers and privileges different from those of the natural individuals who created it, who own it, or whom it employs.'

"In Bucklew v. Hawkins, Ash, Baptie & Co. LLP, 329 F.3d 923 (7th Cir. 2003), which was decided subsequent to Cedric Kushner, the 7th Circuit affirmed judgment in favor of the defendant on a RICO claim involving a parent corporation and its wholly owned subsidiaries.

"In deciding the issue, the court stated: 'A parent and its wholly owned subsidiaries no more have sufficient distinctiveness to trigger RICO liability than to trigger liability for conspiring in violation of the Sherman Act ... unless the enterprise's decision to operate through subsidiaries rather than divisions somehow facilitated its unlawful activity, which has not been shown here.'

"Bucklew suggests that although a parent corporation and its subsidiaries will generally not meet the distinctiveness requirement, they may be found distinct if the unlawful activity is facilitated by the enterprise's decision to operate through subsidiaries."

Conducting Affairs

"Liability under RICO," Brown explained, "depends on a showing that the defendant conducted or participated in the conduct of the enterprise's affairs not just its own affairs. To 'participate, directly or indirectly, in the conduct of such enterprise's affairs,' [18 U.S.C. [sec]1962(c)] one must have some part in directing those affairs. In other words, the defendant must have participated in the operation or management of the enterprise itself.

"The requirement that a RICO defendant have engaged in the enterprise's affairs rather than just its own is simply another reference to the fact that a RICO defendant must be distinct from the alleged enterprise.

"In Goren v. New Vision International Inc., 156 F.3d 721, 727-28 (7th Cir. 1998), the 7th Circuit observed that the mere existence of a business relationship between the enterprise and the defendant is not sufficient to meet the operation and management test. The court stated that 'simply performing services for an enterprise, even with knowledge of the enterprise's illicit nature, is not enough to subject an individual to RICO liability....'

"Similarly, in [U.S. v. Swan, 250 F.3d 495, 498 (7th Cir. 2000)], the 7th Circuit concluded that receiving a ghost payroll check, taking on clients who were improperly referred by an alderman, failing to file tax returns and using a false Social Security card did not prove that the defendant operated or managed the alleged enterprise (the City of Chicago)."

Pattern of Activity

"Liability under RICO also depends on a showing that Mayflower engaged in a 'pattern of racketeering activity.' 18 U.S.C. [sec]1962(c). In H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 238, (1989), the Supreme Court established that a pattern of racketeering activity requires more than simply a certain number of predicate acts. The court determined that although at least two 'predicate acts' are necessary, they may not be sufficient. The court further stated that a 'pattern is not formed by sporadic activity,' but that a plaintiff must show 'that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.'

"The 'pattern' requirement thus contains both a relatedness and a continuity component. To demonstrate a pattern of racketeering activity under RICO, a plaintiff must prove (1) two or more predicate acts (2) that are related and (3) that involve either a closed period of repeated conduct (closed-ended continuity) or present the threat of repetition in the future (open-ended continuity).

"The relatedness component is established when the conduct in question embraces criminal acts that have the same or similar purposes, results, participants, victims or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.

"To establish a RICO pattern it must also be shown that the predicates themselves amount to, or otherwise constitute a threat of, continuing racketeering activity. The 'continuity' requirement is both a closed- and open- ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition."

"Closed-ended continuity may be demonstrated by a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement.

"Historically, the 7th Circuit looked at the following factors to determine whether closed-ended continuity was established: (1) the number and variety of predicate acts; (2) the time period over which the predicate acts were committed; (3) the number of victims; (4) the presence of separate schemes; and (5) the occurrence of distinct injuries. Following the Supreme Court's decision in H.J. Inc., the 7th Circuit has recognized that these factors must be analyzed 'with an eye toward achieving a natural and common-sense result.'

"In Midwest Grinding [Co., Inc. v. Spitz, 976 F.2d 1016, 1024 (7th Cir. 1992)], the 7th Circuit noted that duration of the scheme 'is perhaps the closest thing we have to a bright-line continuity test.' The court drew on H.J. Inc., in which the Supreme Court stated that predicate acts extending over 'a few weeks or months and threatening no future criminal conduct' did not satisfy the continuity requirement.

"The court in Pizzo [v. Bekin Van Lines Co., 258 F.3d 629 (7th Cir. 2001)] stated that 'two complaints by dissatisfied customers do not add up to a pattern.' However, in Corley [v. Rosewood Care Center Inc. of Peoria, 142 F.3d 1041, 1048 (7th Cir. 1998)], the plaintiffs identified seven other residents (and classes of unidentified residents) that were victims of the defendants' bait and switch and the 7th Circuit found that the plaintiff sufficiently alleged a pattern of racketeering."

Separate Schemes

"As a threshold matter," Brown noted, "multiple schemes are not required to prove a RICO violation. Proof of multiple schemes is, however, relevant to demonstrating the continuity of racketeering activity.

"Open-ended continuity can be established by showing past conduct that by its nature projects into the future with a threat of repetition. The threat of continuity may be established by showing that the predicate acts or offenses are part of an ongoing entity's regular way of doing business.

"To prove mail or wire fraud, it must be shown that: (1) the defendant participated in a scheme to defraud; (2) the defendant had the intent to defraud; and (3) the mails or wires were used in furtherance of the scheme.

"Mayflower argues that 'the "guaranteed not to exceed" or "binding" estimates involve -- at best -- promises of future action, which do not qualify as statements of material fact required to establish mail or wire fraud.'

"At common law, a breach of a promise of future action sounds in contract rather than fraud. However, to establish mail fraud, it is not necessary to establish, as it is in the case of common-law fraud, that there was a misrepresentation of present fact. Rather, it is necessary to establish a scheme to defraud and the intent to implement such a scheme.

"The 'scheme or device' requirement is broad, and has even been viewed as swallowing the rule barring promissory fraud actions."

According to Brown, proof of fraudulent intent is required, but "specific intent to defraud may be established by circumstantial evidence and by inferences drawn from examining the scheme itself which demonstrate that the scheme was reasonably calculated to deceive persons of ordinary prudence and comprehension. In addition, fraudulent intent can be demonstrated by a breach that follows so closely on the heels of a promise that the intent not to keep the promise may be inferred.

"A scheme to defraud can be found when the broken promise is embedded in a larger pattern of deceptions or enticements that reasonably induces reliance and against which the law ought to provide a remedy."

Applying these principles, Brown concluded that Chen produced enough evidence to defeat Mayflower's motion for summary judgment.


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