Practicing Law or Assisting a Criminal Enterprise: Unexpected Potential Civil RICO Liability for Attorneys in Commercial Disputes

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1 Lawyer s Possible RICO Liability Exposure When Representing Commercial Clients Jason R. Sutton Boyce Greenfield, Pashby & Welk LLP PO Box 5015 Sioux Falls, South Dakota (605) jrsutton@bgpw.com Practicing Law or Assisting a Criminal Enterprise: Unexpected Potential Civil RICO Liability for Attorneys in Commercial Disputes Biographical Information Jason R. Sutton is a partner in the law firm of Boyce, Greenfield, Pashby & Welk LLP in Sioux Falls, South Dakota. His practice involves complex commercial litigation, complex family law matters, professional liability defense including attorneys and insurance agents, and complex trust and estates litigation in both state and federal courts in South Dakota. Introduction In an effort to eradicate organized crime, Congress adopted the Racketeer Influenced and Corrupt Organizations Act ( RICO ). Since its adoption, civil RICO liability has expanded to others outside organized crime, including asserting civil RICO claims against attorneys. Among the more disconcerting RICO claims are those asserted against attorneys who are merely representing their client s interests. Due to the frequent assertion of fraud in commercial disputes, commercial attorneys are more susceptible to these types of claims. This article provides a brief discussion of some basic RICO principles without tackling the ambitious task of describing all the nuanced issues arising in RICO cases. Through the discussion of these principles, the article will attempt to explain how RICO can be applied (or does not apply) to commercial attorneys. Finally, the article ends with some brief practical suggestions to avoid potential RICO liability and, in the unfortunate event a claim is asserted, suggestions for handling the claim. I. RICO s Statutory Scheme. Congress adopted RICO in an effort to prevent the infiltration of legitimate business by organized crime. United States v. Turkette, 452 U.S. 576, 588 (1981). Involvement in organized crime is not however a prerequisite to a RICO 1

2 violation. Sedima, S.P.R.L v. Imrex Co., Inc., 473 U.S. 479, 498 (1985). In fact, the Supreme Court has acknowledged the frequent use of civil RICO in fraud cases involving legitimate business. Id. at 499. According to the Supreme Court, Congress intended that RICO be broadly construed. Id. at 498. In doing so, the Court applied RICO outside the expected organized crime setting. Violation of RICO carries serious consequences, including subjecting the defendant to criminal liability, 18 U.S.C. 1963(a), forfeiture, 18 U.S.C. 1964(b), and civil liability, 18 U.S.C RICO s substantive prohibitions are contained in 18 U.S.C. 1962, which contains four subsections. Most RICO claims against attorneys are based upon subsections (c). Ronald Mallen & Jeffrey Smith, Legal Malpractice 12.2 ( Virtually all RICO claims against professionals have alleged a violation of section 1962(c) ). Subsection (c) states: (c) 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. 18 U.S.C. 1962(c). Subsection (d), which prohibits conspiracy to violation any section of 1962, also may be implicated. A. Elements of 1962(c) RICO Violation. According to the Supreme Court, three elements predominate a 1962(c) claim: (1) the conduct (2) of an enterprise (3) through a pattern of racketeering activity. Salinas v. United States, 522 U.S. 52, 62 (1997). 1. Elements 1 and 2: Conduct of an Enterprise When analyzing 1962(c) liability, the first two elements conduct and enterprise should logically be examined together. The first step is defining the alleged enterprise. Only after defining the appropriate enterprise can you determine whether the alleged defendant is actually conducting that enterprise. Enterprise is statutorily defined as any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. 1961(4). Under the plain language of 1962, an enterprise can be a corporate entity or a business. An enterprise does not need to be corporate entity but instead could be 2

3 an entity or structure legally recognized for another purpose such as a bankruptcy estate. Handeen v. Lemaire, 112 F.3d 1339, 1350 (8 th Cir. 1997). Nor does an enterprise need to have the structure, leadership, organization, or history typically associated with organized crime organizations. United States v. Bergin, 650 F.3d 257, 274 (3d Cir. 2011). Under the plain language of 1962(c), an enterprise can be any group of individuals associated in fact. As recognized by the Supreme Court, the very concept of association in fact is expansive. Boyle v. United States, 556 U.S. 938, 944 (2009). An association-in-fact enterprise is a group of persons associated together for a common purpose for engaging in a course of conduct. United States v. Turkette, 452 U.S. 576, 583 (1981). The association-in-fact enterprise must have a recognizable structure that includes three features: a purpose, relationships among those associated with the enterprise, and longevity to permit these associates to pursue the enterprise s purpose. Boyle, 566 U.S. at 946. At the same time, an association-in-fact enterprise can be an informal group without much needed structure. Id. at 948. Importantly, once the alleged enterprise is defined, the next analytical step is to compare the alleged enterprise to the alleged defendant. To establish 1962(c) liability, the plaintiff s must allege and prove the existence of two legally distinct entities: (1) a person, and (2) an enterprise. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). 1962(c) liability attaches for a person who is employed by or associated with an enterprise. United States v. Bergin, 650 F.3d 257, 266 (3d Cir. 2011). Under the law, the person (who is the defendant) cannot be the same as the alleged enterprise. This is known as the distinctiveness requirement, which prohibits the alleged enterprise from being liable under 1962(c). As a result, if the alleged enterprise is a corporate entity, then that entity cannot be liable under 1962(c). The corporate entity s employees, however, are legally distinct from the entity, and thus, the employee can be a person liable under 1962(c) even if the corporate entity can be the alleged enterprise. Cedric Kushner Promotions, Ltd, 533 U.S. at 163. This rule applies even if the corporate employee is acting within the scope of his or her authority. Id. at 165. Courts have recognized that law firms can satisfy RICO s enterprise requirement. See Crowe v. Henry, 43 F.3d 198, 206 (5 th Cir. 1995). In these instances, the attorneys employed by (or even owning) the law firm are legally distinct from the law firm and can be cognizable defendants. 3

4 Next, after defining the person and the enterprise, the plaintiff s claim must allege and prove that the person must have some part in directing the affairs of the enterprise. Reeves v. Ernst & Young, 507 U.S. 170, 179 (1993). Section 1962(c) liability only attaches to a person who has participated in the operation or the management of the enterprise itself. Id. at 183. This is known as conducting the enterprise. The conduct requirement has prevented 1962(c) liability from attaching to accounting firms who were merely performing an audit of the alleged enterprise a cooperative. Id. It also likely prevents RICO liability for attorneys representing the alleged enterprise as part of a normal law practice. See Handeen v. Lemaire, 112 F.3d 1339, 1348 (8 th Cir. 1998) ( [A]ttorney or other professional does not conduct an enterprise's affairs through run-of-the-mill provision of professional services. ). See also 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice 12:8. In addition to requiring that the attorney actually direct the enterprise, Reeves also provided some additional protection for professionals such as attorneys because the Supreme Court held that aiding and abetting claims do not satisfy the requirement that the defendant conduct the enterprise. Reeves, 507 U.S. at ; 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice 12:8. 2. Element 3: Pattern of Racketeering Activity. The third element requires that the plaintiff allege and prove a pattern of racketeering activity. Racketeering activity is defined in 18 U.S.C. 1961(1), which lists various state and federal criminal acts. One of the listed criminal acts is securities fraud. In addition, both wire fraud and mail fraud fit within the definition of racketeering activity. Because of the prevalent use of phones, internet, and the mail for purposes of communication in commercial matters, these alleged crimes provide a fertile ground for establishing racketeering activity. To state a cognizable 1962(c) RICO claim, the plaintiff must establish a pattern of racketeering activity. Hardeen, 112 F.3d at U.S.C defines pattern of racketeering activity as at least two acts of racketeering activity,... the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity. The pattern of racketeering activity does not require multiple criminal schemes. H.J., Inc. the Northwestern Bell Telephone Co., 492 U.S. 229, 235 (1989). 4

5 In H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989), the Supreme Court defined the pattern of racketeering requirement. To prove a pattern of racketeering activity, there must be a showing a relationship between the predicates and of the threat of continuing activity. H.J., Inc. v. the Northwestern Bell Telephone Co., 492 U.S. 229, 238 (1989) (internal quotation and citations omitted). The plaintiff must prove that the prior pattern of predicate acts indicate a threat of continuing racketeering activity into the future. Id. at 240. H.J. Inc. v. Northwestern Bell Telephone Co. created a two-part test for pattern of racketeering activity: the relationship requirement and the continuity requirement. 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice, 12:7 (2012). Other courts, such as the Third Circuit, have adopted more multi-factored tests. See Barticheck v. Fidelity Union/First Nat l State, 832 F.2d 36, (3d Cir. 1987). The relationship requirement mandates some showing of a relationship between the predicate acts. H.J. Inc., 429 U.S. at 239. The relationship prong of the pattern element is satisfied if the predicate acts 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. Wisdom v. First Midwest Bank, of Poplar Bluff, 167 F.3d 402, 406 (8 th Cir. 1999); Bergin, 650 F.3d at 274. To satisfy the pattern element, there must be a showing of continuing. According to the Supreme Court, continuity can be stabled one of two ways: open-ended continuity and (2) close ended continuity. Id. at 241. The continuity requirement also can be satisfied through open-ended continuity. H.J., Inc., 492 U.S. at 242. Open-ended continuity allegations against attorneys are rare. 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice 12:7. Open-ended continuity requires proof that the alleged predicate acts threaten to extend into the future. Craig Outdoor Advertising, Inc. v. Viacom Outdoor, Inc., 528 F.3d 1001, 1028 (8 th Cir. 2008). In other words, there must be allegations indicating ongoing criminal activity. Wisdom v. First Midwest Bank, of Poplar Bluff, 167 F.3d 402, RICO claims against attorneys are more likely to involve close-ended continuity. Critically, close-ended continuity requires the plaintiff to prove predicate acts occurred over an extended period of time. H.J., Inc., 492 U.S. at

6 Courts have grappled with various lengths of time over which the predicate acts occurred for purposes of establishing close ended continuity. For instance, in the Eighth Circuit, close ended continuity requires predicate acts extending over a period of time exceeding one year. Press Constr. II, Inc. v. Doe, 660 F.3d 346, 357 (8 th Cir. 2011). Other jurisdictions require predicate acts exceeding two years in duration. See First Capital Asset Management, Inc. v. Brickelbush, Inc., 150 F. Supp. 2d 624, 634 (S.D.N.Y. 2001) ( [T]his circuit has not held that a period of less than two years amounted to a period of time sufficiently substantial to make out a closed-ended pattern. ). Due to the long period of time required for closeended continuity, this may often provide a defense to a RICO claim against an attorney. 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice 12:7. In evaluating the continuity requirements, if the predicate acts are based upon mail or wire fraud, then it is important to look at each predicate act. Some courts have required that in order to be counted for continuity purposes, each specific mailing or call must contain a material misrepresentation. Cress Construction, Inc., 640 F.3d at 356. In sum, because most RICO claims against attorneys are based upon 1962(c), practitioners should pay particular attention to that section. The foregoing summary was intended to be a brief summary of the elements and key defenses likely applicable to RICO cases asserted against attorneys. B. RICO Conspiracy Liability Under 1962(d). Section 1962(d) renders it unlawful for any person to conspire to violate subsections a through c. Oftentimes the conspiracy claim will be the claim asserted against attorneys or other professionals arising out of their representation of their clients. Plaintiffs will allege that the attorney was conspiring with the client to violate RICO. To establish a cognizable 1962(d) RICO conspiracy claim, the plaintiff must provide evidence that the defendant entered into an agreement to breach the [RICO] statute. 112 F.3d 1339, 1354 (8 th Cir. 1997). In other words, there must be some evidence indicating that the defendant objectively manifested an agreement to participate... in the affairs of [the] enterprise. Pannino v. Selig, 258 F.Supp.2d 914, 925 (W.D. Ark. 2003). Conclusory allegations that a defendant conspired with others to harm the plaintiff is not sufficient to state a valid RICO conspiracy claim. Instead, the plaintiff must allege and prove facts relating to the nature of the conspiracy. 6

7 For instance, one court granted a motion to dismiss for failure to state a claim because the RICO complaint failed to allege any facts indicating the defendants formed an agreement, the nature of the alleged conspiracy, or the defendants respective roles in the conspiracy. Koulouris v. State of Chalmers, 790 F. Supp (N.D. Ill. 1992). Another court indicated that allegations stating the defendants were aware of the fraudulent RICO enterprise and intended to participate in it was not sufficient to state a RICO conspiracy claim. Natomas Gardens Investment Group, LLC v. Sinadinosi, 710 F.Supp.2d 1008, 1022 (E.D. Cal. 2010). In other case, the court dismissed the RICO conspiracy claim for failure to allege who made the agreement, when the agreement was made, or how the defendants made the agreement. Solomon v. Blue Cross and Blue Shield Association, 574 F.Supp.2d 1288, 1292 (S.D. Fla. 2008). Due to the specificity requirements stated by numerous courts, RICO conspiracy claims should be reviewed closely for whether adequate facts have been pled regarding the conspiracy. If not, the complaint is vulnerable to a motion to dismiss for failure to state a claim. II. Litigation and Remedies In a Civil RICO Claim. A plaintiff has a private right of action for violation of RICO under 18 U.S.C. 1964(c), which states in relevant part that [a]ny person injured in his business or property by reason of violation of 1962 of this chapter may sue therefore.... Under 1964(c), a successful plaintiff is entitled to recover treble damages and the cost associated with bringing the RICO lawsuit, including attorney s fees. To assert a cognizable RICO claim, the plaintiff must have statutory standing. Courts have recognized that 1964(c) delineates the statutory standing requirement. Gomez v. Wells Fargo Bank, N.A., 676 F.3d 655, 659 (8 th Cir. 2012). There are two aspects of the standing issue. First, the plaintiff must show that he was injured in his business or property. 18 U.S.C. 1962(c). Generally, in commercial cases, this will be satisfied. The second part of the standing issue relates to causation. To recover, the plaintiff must prove both but for causation and proximate cause. Anza v. Ideal Steel Supply Co., 547 U.S. 451, 457 (2006). The proximate cause requirement mandates that the alleged RICO conduct directly cause the plaintiff s loss. Id. at

8 In Anza, the alleged RICO activity was several years of fraudulent sales tax returns. The plaintiff alleged that the defendant s submission of fraudulent taxes through the mail (mail fraud) enabled the plaintiff to reduce the amount charged customers, and thereby, wrongfully obtain market share. At least regarding 1962(c), the plaintiff did not show proximate cause because the defendant s conduct defrauded the state rather than the plaintiff. In other words, the conduct was not a direct cause of the loss to plaintiff. In analyzing causation, it is important to note that when the alleged predicate acts are based upon causation, the Supreme Court has held that the plaintiff does not need to reply on the misrepresentation to prove causation. See Bridge v. Phoenix Bond & Indemnity Co., 522 U.S (2008). Finally, defense practitioners should be aware of the applicable statute of limitations governing civil RICO claims. Borrowing from the Clayton Act, the U.S. Supreme Court held a four-year statute of limitations applies to RICO claims. Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 142 (1987). The applicable limitations period accrues when the plaintiff knew or reasonably should have known of his or her injury. Rotella v. Wood, 528 U.S. 549, 552 (2000). Although equitable tolling may apply in certain instances, the limitations period is not tolled simply because the alleged predicate acts were fraudulent or concealed. 2 Ronald Mallen & Jeffrey Smith, Legal Malpractice 12:12. III. Practical Tips Defending RICO Claims I want to conclude this article with 10 practical pointers and suggestions in avoiding and defending a civil RICO claim. Although perhaps pertinent to other areas, these tips are particularly pertinent for attorneys in avoiding or defending civil RICO claims. 1. Document Your File. Like all attorney liability issues, good file documentation is key to minimizing liability. Particularly helpful is evidence that the client was making the primary decisions rather than the attorney. This will assist the attorney in arguing he was not conducting the enterprise. 8

9 2. Practice Law Rather Than Run Businesses. Generally, if an attorney is simply practicing law, he or she should be able to minimize RICO exposure. When attorneys begin actively directing or controlling their clients business is when troubles may develop. Of course, like many things, this is a matter of degree. The more the attorney is providing mainstream legal services, the less likely RICO should be a problem. 3. Truth is a Defense. Because the predicate acts for many RICO claims involving attorneys are based upon fraud, the best way to avoid liability is to make sure that everything represented by you or your clients is as accurate possible. This is self-evidence but worth repeating. 4. Remove. Remove. Remove. If you find yourself defending a RICO claim in state court, remove it immediately. State judges likely have little experience with RICO. Additionally, due to the technical nature of RICO claims, you will want to litigate in front of a federal court who has had prior experience with RICO. 5. Strongly Consider a Motion to Dismiss for Failure to State a Claim. In defending a civil RICO claim, it will be important to analyze the complaint to determine whether the plaintiff has fully complied with the technical requirements of RICO. Given the technical nature of this area of the law, many complaints are legally deficient and, at a minimum, you may be able to narrow some of the claims if not dispose of the entire case through a motion to dismiss for failure to state a claim. 6. Remember Fed. R. Civ. P. 9(b). Oftentimes the predicate acts for a civil RICO claim will be based upon mail fraud or wire fraud. Because the allegations are fraud, Federal Rule of Civil Procedure 9(b) requires that the plaintiff plead the alleged fraud with specificity and particularity. There is some civil RICO case law indicating that the Rule 9 particularity requirement prevents plaintiffs from pleading allegations on 9

10 information and belief. As part of a motion to dismiss, it is important to analyze the interplay of Rule 9 with the Rule 12(b)(6) and Twombly standard. 7. In Discovery, Force the Plaintiff to Define and Identify the Alleged Enterprise Early. Requests for production may be a method used to confirm the identity of the alleged enterprise. Once the nature of the enterprise is defined, it becomes easier to determine if the defendants in fact are directing that enterprise. Oftentimes in representing attorneys or other professionals, this will provide an opportunity for summary judgment because the alleged enterprise will be the attorney s client s business. If true, then the attorney likely is not directing or managing the enterprise. 8. Look at the Timeline of the Predicate Acts. As noted by Ronald Mallen & Jeffrey Smith s treatise on malpractice, most RICO claims against attorneys are based upon close-ended continuity. Because closeended continuity (depending on your jurisdiction) may require predicate acts occurring over in excess of two years, this provides a valuable defense in many cases. 9. In RICO Conspiracy Cases, Force the Plaintiff to Articulate Specifics on When the Alleged Conspiracy Developed and What is Agreed to. The plaintiff must allege and prove that the defendant specifically enter into an agreement to commit the pattern of racketeering activity. 10. Never Forget Reeves v. Ernst & Young. This case confirms that professionals, including attorneys, who are simply representing their clients, are not conducting a RICO enterprise under 1962(c). Conclusion Despite its intended adoption to combat organized crime, the Supreme Court has repeatedly expanded the scope of RICO. Unfortunately, the breadth of RICO has been used to expand basic fraud and commercial cases into expansive and risky RICO claims, including cases against the professionals (such as attorneys and 10

11 accountants) who work with commercial clients. Because of this, practitioners should be aware of RICO and its reach. Ultimately, the technical aspect of RICO claims makes them challenging for both plaintiffs and defendants. Because of their technical nature, plaintiff s counsel likely will stumble on some of the technical aspects of the claim. Thus, defense attorneys should be in a position to use those technical claims to their advantage. 11