741 F.2d 482 (2nd Cir. 1984), 796, Sedima, S.P.R.L. v. Imrex Co., Inc.

Docket Nº:796, Docket 83-7965.
Citation:741 F.2d 482
Party Name:SEDIMA, S.P.R.L., Appellant, v. IMREX COMPANY, INC., Gidon Armon and Jacob Armon, Appellees.
Case Date:July 25, 1984
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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741 F.2d 482 (2nd Cir. 1984)

SEDIMA, S.P.R.L., Appellant,


IMREX COMPANY, INC., Gidon Armon and Jacob Armon, Appellees.

No. 796, Docket 83-7965.

United States Court of Appeals, Second Circuit

July 25, 1984

        Argued Feb. 1, 1984.

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        Franklyn H. Snitow, New York City (William H. Pauley, III, Keith S. Orenstein, Orenstein, Snitow & Pauley, New York City, of counsel), for appellant.

        Richard Eisenberg, Garden City, N.Y. (Shaw, Goldman, Licitra, Levine & Weinberg, Garden City, N.Y., of counsel), for appellees.

        Before LUMBARD, OAKES and CARDAMONE, Circuit Judges.

        OAKES, Circuit Judge:

        This is another in the new wave of cases involving "private civil RICO"--the private right of action found in the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961-1968 (1982). Appeal is from a judgment, designated as final pursuant to Fed.R.Civ.P. 54(b), of the United States District Court for the Eastern District of New York, I. Leo Glasser, Judge, dismissing the RICO claims in appellant's amended complaint. 574 F.Supp. 963. We affirm.


        This case involves business fraud. Plaintiff-appellant Sedima S.P.R.L. (Sedima) is a Belgian corporation in the business of importing and exporting to and from Belgium electronic, mechanical and hydraulic parts manufactured in the United States and abroad. Appellee Imrex is an American corporation engaged in exporting aircraft and aircraft-related electronic component parts. Appellees Jacob Armon and Gidon Armon are officers of Imrex.

        In 1979, Sedima and Imrex entered into a joint venture to provide electronic component parts for a NATO subcontractor in Belgium. Imrex obtained the parts and shipped them to Europe pursuant to orders secured by Sedima. Sedima allegedly secured approximately $8.5 million worth of orders to be placed through Imrex.

        Sedima alleges that Imrex and the Armons fraudulently prepared purchase orders, invoices and credit memoranda for Sedima that they knew falsely overstated purchase prices, attendant costs and shipping and financing charges of the parts purchased on behalf of the joint venture. The complaint further alleges that Imrex received monies belonging to the joint venture pursuant to these fraudulent purchase orders, invoices and credit memoranda. In addition to counts alleging breach of contract, breach of fiduciary duty, unjust enrichment, breach of the joint venture agreement, conversion, breach of a constructive trust and a cause of action based on quasi contract, three of the counts allege violations of RICO, 18 U.S.C. Sec. 1962(c). 1

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        Two of the RICO counts allege that the fraudulent purchase orders, invoices and credit memoranda constitute a pattern of racketeering activity, the predicate acts being separate and numerous violations of the Mail Fraud Act, 18 U.S.C. Sec. 1341 (1982) and the Wire Fraud Act, 18 U.S.C. Sec. 1343 (1982). The third count charges a RICO conspiracy under 18 U.S.C. Sec. 1962(c) and (d). 2 Sedima seeks treble damages and reasonable attorneys' fees under these RICO counts. 18 U.S.C. Sec. 1964(c). 3

The District Court Decision

        Judge Glasser dismissed the RICO counts on the basis that there was a failure to allege a RICO-type injury. In so holding, he relied on a series of decisions, discussed infra, which have stated that in order for an injury to be "by reason of a violation of section 1962," as required by section 1964(c), something more than or different from injury that would result from the predicate acts alone must be shown by the plaintiff. Bankers Trust Co. v. Feldesman, 566 F.Supp. 1235, 1240-42 (S.D.N.Y.1983); Landmark Savings & Loan v. Loeb Rhoades, Hornblower & Co., 527 F.Supp. 206, 206-09 (E.D.Mich.1981); North Barrington Development, Inc. v. Fanslow, 547 F.Supp. 207, 210-11 (N.D.Ill.1980).

        The district court adopted the reasoning of two related lines of cases. One series of cases, relying on an analogy between RICO and the antitrust laws, requires that a RICO plaintiff allege a "competitive injury," that is, an injury to business or property stemming from competitive harm. North Barrington, 547 F.Supp. at 210-11, Harper v. New Japan Securities International, Inc., 545 F.Supp. 1002, 1007 (C.D.Cal.1982); Feldesman, 566 F.Supp. at 1241. The other series of cases requires plaintiffs to allege a "racketeering enterprise injury," an injury that occurs where "a civil RICO defendant's ability to harm the plaintiff is enhanced by the infusion of money from a pattern of racketeering acts into the enterprise." Landmark Savings, 527 F.Supp. at 209, relying upon Note, Reading the Enterprise Element Back Into RICO: Sections 1962 and 1964(c), 76 Nw.U.L.Rev. 100, 125-33 (1981). Judge Glasser found no allegation of any injury in this case apart from that which would result directly from the alleged predicate acts of mail fraud and wire fraud, and accordingly dismissed the RICO counts.


        The problem addressed by the district court, which has received much attention

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both in the courts and among commentators, is that a broad reading of the civil RICO provisions would allow plaintiffs to bring suit in federal court 4 under RICO nearly anytime they could allege injury caused by two acts which are violations of any one of the predicate acts listed in RICO. Since these predicate acts include a great many state law violations, federal securities law violations, and federal mail and wire fraud violations, an expansive interpretation of RICO allows plaintiffs to bring into federal courts many claims formerly subject only to state jurisdiction, and to bypass remedial schemes created by Congress, particularly in the securities area. The fact that successful RICO plaintiffs may obtain treble damages and attorneys' fees provides, of course, additional incentives to plaintiffs to categorize their actions as RICO claims.

        Section 1964(c) states that anyone "injured" "by reason of" a violation of section 1962 is entitled to treble damages. Section 1962 "violations" include conducting "enterprises" "through a pattern of racketeering"; a "pattern of racketeering" is defined by section 1961(5) as two or more "acts of racketeering" occurring within a given time. "Acts of racketeering" are defined by section 1961(1), inter alia, as any of a number of acts "chargeable under State law," acts "indictable" under a variety of federal laws, or an "offense" under the federal securities law. Thus, ignoring for the moment some troubling ambiguities, the statute on its surface seems to allow private suits for people injured by defendants who have committed two so-called predicate acts.

        Given this language it is not surprising that there has been an explosion of civil RICO litigation. Only a few cases including civil RICO claims were published in the decade following passage of the Act in 1970; 5 a law review note asserts that courts published only two opinions dealing with civil RICO by 1978 and only thirteen by early 1981. Note, Civil RICO: The Temptation and Impropriety of Judicial Restriction, 95 Harv.L.Rev. 1101 n. 7 (1982). There are now over 100 published decisions. Siegel, "RICO" Running Amok in Board Rooms, L.A. Times, Feb. 15, 1984, at 1. This development has resulted, no doubt, from the bar's increased awareness of the statute, spawned, perhaps, by an influential law review article coauthored by Professor G. Robert Blakey and Brian Gettings which proposed a broad reading of the statute. Professor Blakey's position as chief counsel to the Senate subcommittee which proposed RICO has evidently given his expansive views of the statute special credence. 6 A veritable wave of commentaries and cases making civil claims along lines suggested by Blakey and Gettings and others has occurred. We are told that there is now indeed a "RICO bar" which specializes in bringing or defending

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RICO claims. And members of that "bar" have found, as would appear obvious, that the stigma associated with the label "racketeering" is a good settlement weapon. 7 Indeed, a current adage is said to be that "RICO provides the only civil action where the defendant pleads not guilty." Bridges, supra note 6 at 44.

        The problem with civil RICO is not the explosion of federal litigation. Congress is of course free to create federal causes of action for civil litigants within constitutional limits not necessarily in question here. But see infra notes 24, 49. But there is simply no evidence that in creating RICO, Congress intended to create the broad civil cause of action that the reading of the statute given by its proponents would allow.

        The Racketeer Influenced and Corrupt Organizations Act, as its very name implies, was designed to combat organized crime. The damage done by organized crime was the subject of much public concern and congressional activity throughout the 1950s and 1960s. 8 RICO was enacted as Title IX of the Organized Crime Control Act of 1970, Pub.Law 91-452 (1970), an act designed "to seek the eradication of organized crime in the United States ... by providing new remedies to deal with unlawful activities of those engaged in organized crime." 116 Cong.Rec. 35191 (1970).

        Title IX itself was designed "to protect legitimate businesses against the syndicate's infiltration." 9 It was an attempt to deal with organized crime as an economic phenomenon. In so doing, its enforcement provisions were modeled after the enforcement provisions of the antitrust laws. See, e.g., infra text accompanying note 26.

        Given the general purpose of the RICO legislation, the uses to which private civil RICO has been put have been extraordinary, if not outrageous. Section 1964(c) has not proved particularly useful for generating treble damage actions against mobsters by victimized...

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