507 U.S. 170 (1993), 91-886, Reves v. Ernst & Young

Docket Nº:No. 91-886
Citation:507 U.S. 170, 113 S.Ct. 1163, 122 L.Ed.2d 525, 61 U.S.L.W. 4207
Party Name:Reves v. Ernst & Young
Case Date:March 03, 1993
Court:United States Supreme Court
 
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Page 170

507 U.S. 170 (1993)

113 S.Ct. 1163, 122 L.Ed.2d 525, 61 U.S.L.W. 4207

Reves

v.

Ernst & Young

No. 91-886

United States Supreme Court

March 3, 1993

Argued Oct. 13, 1992

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

A provision of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c), makes it unlawful

for any person employed by or associated with [an interstate] enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. . . .

After respondent's predecessor, the accounting firm of Arthur Young and Company, engaged in certain activities relating to valuation of a gasohol plant on the yearly audits and financial statements of a farming cooperative, the cooperative filed for bankruptcy, and the bankruptcy trustee brought suit, alleging, inter alia, that the activities in question rendered Arthur Young civilly liable under § 1962(c) to petitioner holders of certain of the cooperative's notes. Among other things, the District Court applied Circuit precedent requiring, in order for such liability to attach, "some participation in the operation or management of the enterprise itself"; ruled that Arthur Young's activities failed to satisfy this test; and granted summary judgment in its favor on the RICO claim. Agreeing with the lower court's analysis, the Court of Appeals affirmed in this regard.

Held: One must participate in the operation or management of the enterprise itself in order to be subject to § 1962(c) liability. Pp. 177-186.

(a) Examination of the statutory language in the light of pertinent dictionary definitions and the context of § 1962(c) brings the section's meaning unambiguously into focus. Once it is understood that the word "conduct" requires some degree of direction, and that the word "participate" requires some part in that direction, it is clear that one must have some part in directing an enterprise's affairs in order to "participate, directly or indirectly, in the conduct of such . . . affairs." The "operation or management" test expresses this requirement in a formulation that is easy to apply. Pp. 177-179.

[113 S.Ct. 1166] (b) The "operation or management" test finds further support in § 1962's legislative history. Pp. 179-183.

(c) RICO's "liberal construction" clause -- which specifies that the "provisions of this title shall be liberally construed to effectuate its remedial purposes" -- does not require rejection of the "operation or management" test. The clause obviously seeks to ensure that Congress'

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intent is not frustrated by an overly narrow reading of the statute, but it is not an invitation to apply RICO to new purposes that Congress never intended. It is clear from the statute's language and legislative history that Congress did not intend to extend § 1962(c) liability beyond those who participate in the operation or management of an enterprise through a pattern of racketeering activity. Pp. 183-184.

(d) The "operation or management" test is consistent with the proposition that liability under § 1962(c) is not limited to upper management. "Outsiders" having no official position with the enterprise may be liable under § 1962(c) if they are "associated with" the enterprise and participate in the operation or management of the enterprise. Pp. 184-185.

(e) This Court will not overturn the lower courts' findings that respondent was entitled to summary judgment upon application of the "operation or management" test to the facts of this case. The failure to tell the cooperative's board that the gasohol plant should have been valued in a particular way is an insufficient basis for concluding that Arthur Young participated in the operation or management of the cooperative itself. Pp. 185-186.

937 F.2d 1310, affirmed.

BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and STEVENS, O'CONNOR, and KENNEDY, JJ., joined, and in all but Part IV-A of which SCALIA and THOMAS, JJ., joined. SOUTER, J., filed a dissenting opinion, in which WHITE, J., joined, post, p. 186.

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BLACKMUN, J., lead opinion

JUSTICE BLACKMUN delivered the opinion of the Court.[1]

This case requires us once again to interpret the provisions of the Racketeer Influenced and Corrupt Organizations (RICO) chapter of the Organized Crime Control Act of 1970, Pub.L. 91-452, Title IX, 84 Stat. 941, as amended, 18 U.S.C. §§ 1961-1968 (1988 ed. and Supp.II). Section 1962(c) makes it 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. . . .

The question presented is whether one must participate in the operation or management of the enterprise itself to be subject to liability under this provision.

I

The Farmer's Cooperative of Arkansas and Oklahoma, Inc. (the Co-op), began operating in western Arkansas and eastern Oklahoma in 1946. To raise money for operating expenses, the Co-op sold promissory notes payable to the holder on demand. Each year, Co-op members were elected to serve on its board. The board met monthly, but delegated actual management of the Co-op to a general manager. In 1952, the board appointed Jack White as general manager.

In January, 1980, White began taking loans from the Co-op to finance the construction of a gasohol plant by his company,

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White [113 S.Ct. 1167] Flame Fuels, Inc. By the end of 1980, White's debts to the Co-op totalled approximately $4 million. In September of that year, White and Gene Kuykendall, who served as the accountant for both the Co-op and White Flame, were indicted for federal tax fraud. At a board meeting on November 12, 1980, White proposed that the Co-op purchase White Flame. The board agreed. One month later, however, the Co-op filed a declaratory action against White and White Flame in Arkansas state court, alleging that White actually had sold White Flame to the Co-op in February, 1980. The complaint was drafted by White's attorneys, and led to a consent decree relieving White of his debts and providing that the Co-op had owned White Flame since February 15, 1980.

White and Kuykendall were convicted of tax fraud in January, 1981. See United States v. White, 671 F.2d 1126 (CA8 1982) (affirming their convictions). Harry Erwin, the managing partner of Russell Brown and Company, an Arkansas accounting firm, testified for White, and shortly thereafter the Co-op retained Russell Brown to perform its 1981 financial audit. Joe Drozal, a partner in the Brown firm, was put in charge of the audit, and Joe Cabaniss was selected to assist him. On January 2, 1982, Russell Brown and Company merged with Arthur Young and Company, which later became respondent Ernst & Young.[2]

One of Drozal's first tasks in the audit was to determine White Flame's fixed asset value. After consulting with White and reviewing White Flame's books (which Kuykendall had prepared), Drozal concluded that the plant's value at the end of 1980 was $4,393,242.66, the figure Kuykendall had employed. Using this figure as a base, Drozal factored in the 1981 construction costs and capitalized expenses and concluded that White Flame's 1981 fixed-asset value was approximately

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$4.5 million. Drozal then had to determine how that value should be treated for accounting purposes. If the Co-op had owned White Flame from the beginning of construction in 1979, White Flame's value for accounting purposes would be its fixed asset value of $4.5 million. If, however, the Co-op had purchased White Flame from White, White Flame would have to be given its fair market value at the time of purchase, which was somewhere between $444,000 and $1.5 million. If White Flame were valued at less than $1.5 million, the Co-op was insolvent. Drozal concluded that the Co-op had owned White Flame from the start, and that the plant should be valued at $4.5 million on its books.

On April 22, 1982, Arthur Young presented its 1981 audit report to the Co-op's board. In that audit's Note 9, Arthur Young expressed doubt whether the investment in White Flame could ever be recovered. Note 9 also observed that White Flame was sustaining operating losses averaging $100,000 per month. See Arthur Young & Co. v. Reves, 937 F.2d 1310, 1318 (CA8 1991). Arthur Young did not tell the board of its conclusion that the Co-op always had owned White Flame or that, without that conclusion, the Co-op was insolvent.

On May 27, the Co-op held its 1982 annual meeting. At that meeting, the Co-op, through Harry C. Erwin, a partner in Arthur Young, distributed to the members condensed financial statements. These included White Flame's $4.5 million asset value among its total assets, but omitted the information contained in the audit's Note 9. See 937 F.2d at 1318-1319. Cabaniss was also present. Erwin saw the condensed financial statement for the first time when he arrived at the meeting. In a 5-minute presentation, he told his audience that the statements were condensed and that copies of the full audit were available at the Coop's office. In response to questions, Erwin explained that the Co-op owned White Flame and that the plant had incurred approximately

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$1.2 million [113 S.Ct. 1168] in losses, but he revealed no other information relevant to the CO-Op's true financial health.

The Co-op hired Arthur Young also to perform its 1982 audit. The 1982 report, presented to the board on March 7, 1983, was similar to the 1981 report, and restated (this time in its Note 8) Arthur Young's doubt whether the investment in White Flame was recoverable. See 937 F.2d at 1320. The gasohol plant again was valued at approximately $4.5 million, and was...

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