Bankers Trust Co. v. Rhoades

Bankers Trust Company (“Bankers”) appeals from a judgment of the United States District Court for the Southern District of New York, William C. Conner, Judge, dismissing pursuant to Fed.R.Civ.P. 12(c) Bankers’s complaint which sought, inter alia, treble damages pursuant to the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968 (1982), for injuries suffered principally as a result of defendants’ bankruptcy frauds. The district court, in an opinion reported sub nom. Bankers Trust Co. v. Feldesman, 566 F.Supp. 1235 (S.D.N.Y.1983), found that the complaint failed to state a claim under 18 U.S.C. § 1964 (“civil RICO”) because the statute provides relief only for “distinct RICO injury,” i.e., injury caused by the pattern of racketeering activity rather than by the predicate acts that constitute the pattern. On appeal Bankers challenges the court’s interpretation of the statute. As set forth below, we are in substantial agreement with the district court’s interpretation, and we affirm the dismissal of the complaint.

I. BACKGROUND

The complaint alleges a scheme by the defendants to defraud Bankers through, inter alia, the concealment of assets subject to distribution in bankruptcy and the bribery of a judge. Since the case comes to us on an appeal from entry of judgment on the pleadings pursuant to Rule 12(c), we set forth the facts as alleged in the complaint. Many of the allegations have been thoroughly detailed in the bankruptcy court’s opinion in In re Braten Apparel Corporation, 21 B.R. 239 (Bankr.S.D.N.Y.1982), and the district court’s opinion affirming the bankruptcy court’s order, see 26 B.R. 1009 (S.D.N.Y.1983), familiarity with which is assumed.

The principal actors in the scheme were Braten Apparel Corp. (“BAC”), a corporation that owed Bankers some $4,000,000; defendant Milton Braten (“Braten”), an officer and principal shareholder of BAC; defendant Daniel Rhoades, an officer, director, and/or shareholder of BAC, and an attorney for BAC and Braten; defendant Herman Soifer, a shareholder of BAC; and Walter Feldesman, an attorney who represented BAC, Soifer, and defendant Brook-field Clothes, Inc. (“Brookfield”). Braten, Rhoades, and Soifer were also officers, directors, and/or shareholders of all of the other corporate defendants named in the complaint in the present action.

A. The Initial Bankruptcy Fraud

The initial fraud consisted of a complex scheme devised in 1974 by Braten, Feldes-man, and Soifer to enable BAC to eliminate, without payment, much of its $4,000,-000 indebtedness to Bankers while retaining valuable assets. In August 1974, BAC acquired all of the stock of Brookfield, an entity then having a net worth of more than $3 million. Prior to the acquisition, Feldesman, Braten, and Soifer agreed that Soifer would be given the apparent ownership of the Brookfield stock but would hold the stock in a secret trust for BAC while BAC filed a bankruptcy petition and gained a discharge of its indebtedness under Chapter XI of the then-applicable Bankruptcy Act of 1898 (“Bankruptcy Act”), 11 U.S.C. §§ 1-1103 (1976). To implement the plan, Braten and Soifer executed a sham “Shareholder’s Agreement,” drafted by Feldes-man, which provided that if BAC or Braten did not furnish a $250,000 loan to Brook-field by a specified date, BAC’s stock in Brookfield would automatically be transferred to Soifer. At the time this agreement was entered into, Braten, Feldesman, and Soifer knew that the funding condition would not be met; they intended that Soi-fer would hold the stock of Brookfield, safe from the claims of BAC’s creditors, only during BAC’s bankruptcy proceedings. Soifer was to return the stock to BAC following its discharge in bankruptcy.

On September 5, 1974, BAC’s stock in Brookfield was transferred to Soifer; on that day BAC filed its petition in bankruptcy. BAC did not list the Brookfield stock as an asset. Braten, Rhoades, Soifer, and Feldesman thereafter affirmatively misrepresented to Bankers and the bankruptcy court that BAC had, through failure to meet the Shareholder’s Agreement’s funding condition, lost its ownership of the stock. Through this and related misrepresentations, Feldesman and the individual defendants induced BAC’s creditors, including Bankers, to approve a plan of arrangement under which Bankers would receive payment of only 17-72% of its claims and BAC would be relieved of more than $4.3 million of its debts. Had BAC’s stock in Brookfield been included in BAC’s plan of arrangement, BAC would have had assets sufficient to satisfy Banker’s claims in full.

BAC’s plan of arrangement was approved by the court in March 1976. In August 1976, Soifer returned the Brook-field stock to BAC. Soifer, Braten, and Rhoades then revealed to Brookfield’s auditors that BAC had in fact owned this stock all along.

In September 1976 Bankers commenced a proceeding in the bankruptcy court under Bankruptcy Act § 386, 11 U.S.C. § 786 (1976), to revoke the confirmation of BAC’s plan of arrangement because of the fraudulent concealment of BAC’s ownership of the Brookfield stock. Following lengthy proceedings including a trial, the bankruptcy court revoked the confirmation in 1982, see In re Braten Apparel Corporation, supra, 21 B.R. 239, finding that the individual defendants had devised and carried out a scheme to defraud by making false statements and oaths in BAC’s listing of the assets of the estate, and by intentionally concealing property of BAC. The bankruptcy court ordered BAC to “offer a plan which is realistic ... in light of the fact that the debtor owns a valuable asset —Brookfield.” Id. at 263. This decision was affirmed by the district court, see 26 B.R. 1009, and the district court’s decision was affirmed by this Court by summary order entered on September 1, 1983.

B. The 1982 Bankruptcy Fraud

In the meantime, however, BAC had entered into a new scheme to protect many of its assets from its creditors. Its principal action, again, was to transfer its stock in Brookfield. In January 1982, defendant Bennington Court Ltd. (“Bennington”) borrowed more than $8.9 million from a financing company called KB Business Credit, Inc. (“KBBC”). Bennington then gave these funds to several of the other defendants in this case. When the funds were not repaid, KBBC brought a civil RICO action for treble damages against BAC, Braten, Rhoades, and others. The defendants quickly settled the lawsuit by having BAC convey its stock in Brookfield — for little or no consideration — to defendant Todd Equipment Leasing Co., Inc., which in turn pledged the stock to KBBC. As a result, BAC was able to frustrate Bankers’s attempt in bankruptcy court to obtain some benefit from BAC’s earlier ownership of the stock of Brookfield.

C. The Frivolous Lawsuits and the Bribery of a Judge

The complaint also alleges that during the perpetration of BAC’s initial bankruptcy fraud, BAC and the individual defendants instituted several frivolous lawsuits against Bankers in New York state court, alleging that Bankers had breached a commitment to extend additional credit to BAC and seeking millions of dollars in damages. The only purpose of these suits was to hinder Bankers’s collection of the debt owed to it by BAC. Each suit was summarily dismissed, but not without Bankers’s having to incur substantial legal expenses.

In August 1977, BAC instituted an action against Bankers in South Carolina based on claims similar to those asserted in the New York actions, seeking $195 million in damages. Braten brought another action in South Carolina, asserting claims, allegedly superior to those of Bankers, to funds in an escrow account derived from the sale of machinery in which Bankers had a security interest. Rhoades acted as counsel to a South Carolina law firm representing BAC and Braten in these actions and, according to the complaint, proceeded to bribe the judge before whom they were pending.

In 1978, while the actions were pending before Judge William H. Ballenger,. Rhoades used a South Carolina corporation formed by him to assume a mortgage debt on which Judge Ballenger was personally liable to the extent of $100,000. Rhoades thereafter made payments on the debt as installments came due. Rhoades’s actions induced Judge Ballenger to render at least two decisions favorable to Braten and BAC: (1) in Braten’s action to collect from the escrow account, he appointed a former partner of the law firm to which Rhoades was counsel as a “special referee” with the power to deny Bankers a jury trial; and (2) in BAC’s $195 million damage action, he arbitrarily denied Bankers’s motion to dismiss. Judge Ballenger eventually recused himself from the escrow account action after citing a “possible conflict of interest,” and his special referee resigned. In the BAC action, the South Carolina Supreme Court reversed Judge Ballenger’s denial of Bankers’s motion to dismiss as an abuse of discretion. In the meantime, however, Bankers had expended more than $100,000 in defending the South Carolina cases.

D.The District Court’s Opinion

Bankers’s complaint alleged that the defendants constituted or formed a RICO “enterprise” within the meaning of 18 U.S.C. § 1961(4); that their actions were criminal offenses involving, inter alia, bankruptcy fraud, perjury, and bribery; that each of the offenses was a “racketeering activity” within the meaning of § 1961(1); that any two such offenses constituted a “pattern of racketeering activity” within the meaning of § 1961(5); that defendants’ formation, control, and conduct of the enterprise through their pattern of racketeering activity violated §§ 1962(a), (b), and (c); and that defendants’ conspiracy to do such acts violated § 1962(d). Bankers demanded, inter alia, treble damages and attorney’s fees pursuant to civil RICO, § 1964(c). Defendants moved for judgment on the pleadings principally on the ground that the complaint was insufficient to state a claim under civil RICO.

In deciding the defendants’ motion, the district court stated that the facts alleged by Bankers “strongly suggest a sinister scheme to defraud the bank and other creditors of the monies they lent in good faith to BAC,” 566 F.Supp. at 1242, and that, “based solely upon the languag'e of the statute, one could hardly contend that [Bankers] has not adequately alleged a violation of § 1962,” the criminal provisions of RICO, id. at 1239. The court concluded, however, that the complaint, did not state a valid claim for relief under civil RICO. Construing § 1964(c)’s requirement that a civil plaintiff be injured “by reason of a violation of section 1962,” the court reasoned that to satisfy this requirement a civil plaintiff must “allege that he has suffered a distinct RICO injury as opposed merely to a direct injury from the underlying predicate acts.” 566 F.Supp. at 1240. Although finding it unnecessary to define what such “distinct RICO injury” would entail, the court opined that the provisions of civil RICO should be limited to the redress of “competitive injury” or “an injury to competition,” id. at 1241. Because Bankers’s complaint alleged only injury that was “a direct consequence of the predicate acts,” and not a “distinct RICO injury,” the district court dismissed the complaint. Id. at 1242. This appeal followed.

II. DISCUSSION

RICO’s provision for a private treble damage right of action reads as follows:

(c) Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue. therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee.

18 U.S.C. § 1964(c). Section 1962 makes it unlawful, inter alia, (1) to invest income derived from a pattern of racketeering activity in any enterprise that is engaged in interstate commerce, § 1962(a); (2) to acquire or maintain control of such an enterprise through a pattern of racketeering activity, § 1962(b); (3) to participate in the conduct of such an enterprise’s affairs through a pattern of racketeering activity, § 1962(c); or (4) to conspire to do any of the above, § 1962(d).

“[Enterprise” is defined to “include[] 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). “[Racketeering activity” is defined as an act or threat involving any of a number of specified felonies chargeable under state law or indictable under specified federal statutes (collectively “predicate acts”); bankruptcy fraud and bribery are included. § 1961(1). A “pattern of racketeering activity” is defined to “require[ ] at least two acts of racketeering activity” within a ten-year period. § 1961(5).

The focus of the present appeal is the meaning of § 1964(c)’s phrase “person injured in his business or property by reason of a violation of section 1962.” The phrase comprises three elements: injury to the plaintiff, causation of that injury, and the conduct that caused the injury. The first two elements present no problem in the instant case.

The requirement that the injury be to the plaintiff’s business or property means that the plaintiff must show a proprietary type of damage. For example, a person physically injured in a fire whose origin was arson is not given a right to recover for his personal injuries; damage to his business or his building is the type of injury for which § 1964(c) permits suit. Bankers has alleged that it has been deprived of various sums of money by the defendants’ activities. There is no question that this constituted “injur[y] in [its] business or property,” and that Bankers has thus adequately pleaded an injury of the type contemplated by § 1964(c).

The requirement that the injury be “by reason of” a violation of § 1962 means that there must be a causal connection between the prohibited conduct and the plaintiffs proprietary injury. Thus, it is insufficient for a plaintiff to prove simply a violation by the defendants and a proprietary injury; it must prove that the defendants’ violation caused the injury. There is no question in this case that Bankers has adequately alleged that its monetary losses occurred “by reason of” conduct of the defendants. The difficulty lies in the nature of the conduct that caused Bankers’s injury.

Section 1964(c) does not provide a private right of recovery unless the conduct that caused the injury was “a violation of section 1962.” We must therefore ask what conduct violates that section. Although, as detailed above, § 1962 has a number of facets, it is clear that it does not itself prohibit the predicate acts that constitute racketeering activity. Commission of two or more predicate acts is but an element of a § 1962 violation; those acts do not themselves constitute the § 1962 violation. Indeed, § 1962 does not even prohibit a pattern of racketeering activity, without more. Rather, there is a violation of § 1962 only if there are present both (1) the pattern of racketeering activity, and (2) the use of that pattern to invest in, control, or conduct, a RICO enterprise. It is this confluence that constitutes the violation and, therefore, the confluence that must cause the proprietary injury.

The import of this analysis is that if a complaint alleges a proprietary injury that is caused by the defendant's predicate acts, rather than by its use of a pattern of racketeering activity in connection with a RICO enterprise, the injury cannot be said to have been caused by “a violation of section 1962.” See Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 at 494, No. 83-7965 (2d Cir.1984). Accordingly, we agree with the conclusion of the district court that a civil RICO complaint must allege “a distinct RICO injury,” by which we mean that it must allege a proprietary injury caused by a RICO violation, not just one caused by some of the essential elements of a RICO violation.

We regard this as the plain meaning of § 1964(c), and we see no basis for inferring that Congress did not intend what it plainly said. The legislative history of civil RICO has been exhaustively explored by this Court recently in Sedima, S.P.R.L. v. Imrex Co., supra, at 488-492, and we need not detail it here. Suffice it to say that the terms of § 1964(c) were not discussed at all in the Senate, whose final RICO bill did not contain a provision for a private right of action, and that the discussions in the House of Representatives centered almost entirely on the provision of civil remedies to be enforced by the government rather than by private parties. See id. at 490 & n. 24. As Sedima notes, the provision for a private treble damage action was added by a subcommittee of the House Judiciary Committee; when the Judiciary Committee reported the amended bill to the House, it did not mention the addition of this right of action. Id. at 489-490. In the House discussion of the bill, there was but one brief remark explaining the substance of the proposed amendment, as Congressman Poff, a member of Judiciary Committee, noted that

at the suggestion of the gentleman from Arizona (Mr. Steiger) and also the American Bar Association and others, the committee has provided that private persons injured by reason of a violation of the title may recover treble damages in Federal courts — another example of the antitrust remedy being adapted for use against organized criminality.

116 Cong.Rec. 35,295 (1970). The remark fully supports our application of § 1964(c) according to its terms, since Congressman Poff spoke of recovery by persons injured by reason of “a violation of the title.”

Bankers argues that it is conceptually impossible to make any distinction between injury flowing from the predicate acts and injury flowing from a pattern of racketeering activity, because a plaintiff injured by the predicate acts is ipso facto injured by the pattern. We disagree. If a plaintiffs injury is that caused by the predicate acts themselves, he is injured regardless of whether or not there is a pattern; hence he cannot be said to be injured by the pattern, and the pattern cannot be said to be the but-for cause of the injury. Further, we can envision a number of circumstances in which injury could be attributable to a pattern but not to the individual predicate acts. For example, a plaintiff who is victimized by a defendant enterprise’s multiple acts of arson may thereafter be denied fire insurance as a result of his fire history; such a plaintiff whose property subsequently suffers innocent fire damage would be unable to obtain reimbursement for the damage, and his monetary loss would be the result of the pattern of predicate acts of the enterprise, rather than any of the individual acts. Or, a plaintiff might be forced to incur an unwanted debt or to take on an unwanted business partner because an enterprise has placed his business in jeopardy by using felonious means to cause a number of his customers to withhold their custom. In each instance, the plaintiff would have suffered an injury to his business or property by reason of the defendants’ use of a RICO enterprise and a pattern of racketeering acts; the individual racketeering acts, however, could not be said to have caused the same injury.

In the present case, we agree with the district court that Bankers’s complaint did not allege a distinct RICO injury, i.e., an injury caused by a violation of § 1962, but only injuries caused by the individual predicate acts — or indeed, acts that are not specified as predicate acts under § 1961(1). Thus, Bankers’s loss of 83% of the debt owed it by BAC was caused by the defendants’ bankruptcy fraud. That injury occurred in 1976 when BAC’s plan of arrangement was approved and BAC was discharged in bankruptcy. The fact that later actions by the defendants may have prevented Bankers from remedying the injury caused it in 1976 does not mean that Bankers was injured by the “pattern” of the bankruptcy fraud and the later acts. Similarly, Bankers's forced expenditures of legal fees in connection with frivolous and corruptly conducted lawsuits occurred as a result of the defendants’ distinct conduct in pursuing those lawsuits; Bankers’s expenses would have been incurred regardless of any other predicate acts performed by the defendants.

Since we cannot interpret Bankers’s complaint as alleging injury caused by the defendants’ violation of § 1962, we conclude that the district court properly dismissed the complaint.

CONCLUSION

The judgment of the district court is affirmed. No costs.

. Feldesman was originally named as a defendant, but by stipulation the complaint against him was dismissed.

. Section 386 of the Bankruptcy Act provided that a bankruptcy court could set aside its confirmation of a debtor’s plan of arrangement

[i]f, upon the application of parties in interest filed at any time within six months after an arrangement has been confirmed, it shall be made to appear that fraud was practiced in the procuring of such arrangement and that knowledge of such fraud has come to the petitioners since the confirmation of such arrangement. ...

11 U.S.C. § 786 (1976).

. Section 1962 also prohibits actions to invest in, control, or participate in such an enterprise through the "collection of an unlawful debt.” Such collection activities are not at issue here and are not intended to be dealt with in our discussion of other aspects of § 1962.

. See note 3, supra.

. As an alternative ground, the Sedima panel also ruled that a plaintiff may not prevail in a civil RICO suit without establishing criminal convictions of the defendant on the underlying predicate acts or a conviction under RICO itself. We need not reach this issue in light of our conclusion that the conduct that caused Bankers’s injury did not constitute a violation of § 1962.

. We do not agree with the view that, because the structure of § 1964(c) was patterned after § 4 of the Clayton Act, 15 U.S.C. § 15 (1982), which grants a private right of action under the antitrust laws, see e.g., Sedima S.P.R.L. v. Imrex Co., supra, at 494; In re Action Industries Tender Offer, 572 F.Supp. 846, 851-52 (E.D.Va.1983); Blakey & Gettings, Racketeer Influenced and Corrupt Organizations (RICO): Basic Concepts—Criminal and Civil Remedies, 53 Temple L.Q. 1009, 1040, 1042 (1980), a civil RICO plaintiff is required to show a "competitive injury” or injury to competition. See Bankers Trust Co. v. Feldesman, supra, 566 F.Supp. at 1241; North Barrington Development, Inc. v. Fanslow, 547 F.Supp. 207, 210-11 (N.D.Ill.1980). Although in enacting RICO Congress made an express finding that organized crime "interfere[s] with free enterprise," Pub.L. No. 91-452, 84 Stat. 922, 923 (1970) (Statement of Findings and Purpose), and the major purpose of Congress’s enactment of RICO was to address the infiltration of organized crime into legitimate business and to protect free and fair enterprise, the objectives of RICO go beyond the objectives of the antitrust laws. Congress was concerned as well with the effects of organized crime upon democratic processes, innocent investors, domestic security, and the general welfare of the United States and its citizens. See id.; S.Rep. No. 617, 91st Cong., 1st Sess. 81-82 (1969). The language used in § 1964(c), "injured in his business or property,” is unaccompanied by any other restrictions as to type of injury, and hence is broad enough to encompass private proprietary injury that has no impact on the plaintiff’s ability to compete or on competition as such. We see no basis in the statute for importing the antitrust concepts. Indeed, as set forth in Sedima S.P.R.L. v. Imrex Co., supra, at 495, the legislative history of civil RICO suggests that Congress did not intend § 1964(c) to be fettered by antitrust concepts. See, e.g., S.Rep. No. 617, 91st Cong., 1st Sess. 81-82 (1969); 115 Cong.Rec. 9567 (1969) (statement of Senator McClellan); id. at 6992-93 (statement of Senator Hruska); Hearings on S. 30, and Related Proposals, Relating to the Control of Organized Crime in the United States, Before Subcomm. No. 5 of the House Comm, on the Judiciary, 91st Cong., 2d Sess. 149 (1970) (statement of the Antitrust Section of the American Bar Association); id. at 157 (statement of Attorney General Mitchell).

. It would of course be possible to fragment virtually any fraudulent scheme and characterize phases of the scheme as violations of various laws (e.g., conspiracy to defraud, fraudulent representations, fraudulent use of the mails, etc.). The matter of whether given conduct should be considered one or more than one "predicate act” is a matter best left, in the first instance, to the discretion of the district judge. See, e.g., Bridges, Private RICO Litigation Based Upon "Fraud in the Sale of Securities," 18 Ga.L.Rev. 43, 66 (1983).