Haroco, Inc. v. American Nat. Bank and Trust Co. of Chicago

• Decision Date: 19 October 1984
• Docket Number: No. 83-2529,83-2529
• Citation: 747 F.2d 384
• Parties: , RICO Bus.Disp.Guide 6100 HAROCO, INC., et al., Plaintiffs-Appellants, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Walter E. Heller International Corporation, & Ronald J. Grayheck, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 384

747 F.2d 384

53 USLW 2234, RICO Bus.Disp.Guide 6100

HAROCO, INC., et al., Plaintiffs-Appellants, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Walter E. Heller International Corporation, & Ronald J Grayheck, Defendants-Appellees.

No. 83-2529.

United States Court of Appeals, Seventh Circuit.

Argued May 6, 1984.

Decided Oct. 19, 1984. ^*

Certiorari Granted Jan. 14, 1985.

See 105 S.Ct. 902.

Aram A. Hartunian, Hartunian, Futterman & Howard, Chicago, Ill., for plaintiffs-appellants.

Donald E. Egan, Katten, Muchin, Zavis, Pearl & Galler, Chicago, Ill., for defendants-appellees.

Before BAUER and CUDAHY, Circuit Judges, and KELLAM, Senior District Judge. ^**

CUDAHY, Circuit Judge.

This appeal presents several issues involving civil claims under the federal Racketeer Influenced and Corrupt Organizations ("RICO") statute. 18 U.S.C. Secs. 1961-1968. The central issue concerns the type of injury a private civil plaintiff must allege to support a RICO claim under 18 U.S.C. Sec. 1964(c). We must also consider several questions involving the RICO provisions requiring that a "person" conduct or participate in the conduct of the affairs of an "enterprise" through a pattern of racketeering activity, as those terms are defined in RICO. 18 U.S.C. Sec. 1962(c). We affirm in part and reverse in part.

I

This is an appeal from the district court's dismissal for failure to state a claim. We shall therefore treat all allegations in the complaint as true and view them in the light most favorable to plaintiffs. The case arises from loans made by defendant American National Bank & Trust Company of Chicago ("ANB") to plaintiffs. Plaintiffs are several businesses, Haroco, Inc., Roman Ceramics, Inc., California Originals, Inc. and Mike Wayne Distilled Products Co. Haroco independently and together with other plaintiffs borrowed several million dollars from ANB between 1979 and 1981. Each loan agreement provided that the rate of interest would be "one per cent over the bank's prime rate," and the prime rate was defined as the "rate of interest charged by the bank to its largest and most creditworthy commercial borrowers for 90-day unsecured commercial loans." The defendants, in addition to ANB, are Ronald J. Grayheck, who is an officer and director of ANB, and Walter E. Heller International Corporation ("Heller International"), which is the parent company of ANB. ¹

Plaintiffs brought this action in March 1983 alleging that defendants had defrauded them in the calculation of the prime rate which determined their own variable interest payments. The only alleged injuries were excessive interest charges resulting from defendants' calculation of the prime rate. Plaintiffs included in their complaint three state law causes of action and two counts based on alleged violations of the federal Racketeer Influenced and Corrupt Organizations ("RICO") provisions in 18 U.S.C. Secs. 1961-1968. ² As we shall explain in more detail below, plaintiffs' RICO claims were predicated on defendants' use of the mails in furtherance of the alleged scheme to defraud plaintiffs by overstating the prime interest rate. Count I of the amended complaint alleged that defendant ANB violated 18 U.S.C. Sec. 1962(c) by conducting ANB's and Heller International's affairs through a pattern of racketeering activity. Count II alleged that defendants Heller International and Grayheck violated section 1962(c) by conducting ANB's affairs through a pattern of racketeering activity.

Defendants moved on three principal grounds to dismiss the RICO counts. First, they argued that plaintiffs failed to allege the requisite causal relationship between their injuries and the RICO violations. Second, defendants argued that plaintiffs failed to allege the requisite relationships between "persons" and the "enterprises," the affairs of which were allegedly conducted through patterns of racketeering activity. Third, defendants argued that plaintiffs had not pleaded the predicate acts of mail fraud with the necessary particularity.

The district court concluded that the plaintiffs had failed to state claims under RICO because they did not allege that they had suffered any injury by reason of a RICO violation in addition to the injuries caused by the alleged mail fraud. The district court held "that a plaintiff's injury to be cognizable under RICO must be caused by a RICO violation and not simply by the commission of predicate offenses, such as acts of mail fraud." Haroco, Inc. v. American National Bank & Trust Co., 577 F.Supp. 111, 114 (N.D.Ill.1983). The district court therefore dismissed plaintiffs' RICO claims without reaching defendants' other arguments. Because there was no other ground for federal jurisdiction, the district court also dismissed the remaining pendent state law claims.

II

Before proceeding to the specific issues raised on this appeal, we must first sketch RICO's broad civil provisions. This court recently said that the civil RICO provisions are "constructed on the model of a treasure hunt." Sutliff, Inc. v. Donovan Companies, 727 F.2d 648, 652 (7th Cir.1984). We begin the hunt with 18 U.S.C. Sec. 1964(c), which provides the private cause of action:

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.

The next step is to examine section 1962, which describes the prohibited conduct. In this case, the most relevant portion of the section provides:

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. Sec. 1962(c). We must next turn to section 1961, which provides special statutory definitions for the key terms of section 1962(c). "Racketeering activity" is defined in section 1961(1) in terms of a long list of state and federal crimes, including mail fraud, 18 U.S.C. Sec. 1341. A person commits mail fraud by using the mails for the purpose of executing a scheme or artifice to defraud. 18 U.S.C. Sec. 1341; United States v. Wormick, 709 F.2d 454, 461-62 (7th Cir.1983). A "pattern of racketeering activity," as required by section 1962(c), requires at least two acts of racketeering activity within a ten year period. 18 U.S.C. Sec. 1961(5). The individual acts of racketeering activity, such as the alleged mail fraud in this case, are usually described as the "predicate offenses."

RICO also defines "person" and "enterprise" very broadly. The term "person" includes "any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C. Sec. 1961(3). The term "enterprise" includes "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. Sec. 1961(4).

RICO's terms are obviously very broad. Because various fraud offenses are included in the definition of "racketeering activity," RICO claims (with their treble-damage provisions) have recently become attractive to many plaintiffs in commercial disputes that otherwise might involve only breach of contract, or securities or state law fraud claims. In cases involving allegations of commercial fraud, for example, it is often possible for a plaintiff to allege two acts of mail fraud, thus constituting a "pattern of racketeering activity," and to allege further that the defendant conducted the affairs of an "enterprise" through that pattern of racketeering activity in violation of section 1962(c). Whether RICO's broad terms should be read literally to permit RICO claims in instances of such "garden variety" fraud has recently been the subject of extended debates in the federal courts. The central issue in this case concerns the type of injury a plaintiff must allege to sustain a RICO claim.

III

The district court concluded that the plaintiffs were required to allege some injury in addition to injuries resulting from the predicate acts of racketeering. The courts imposing such a requirement have often referred to the additional injury as a "racketeering injury" or "racketeering enterprise injury." We shall use the term "racketeering injury." The district court focused on the requirement in 18 U.S.C. Sec. 1964(c) that the RICO plaintiff be injured "by reason of a violation of section 1962," and interpreted that language to mean that allegations of injuries resulting only from the predicate acts of racketeering would not support a RICO claim. 577 F.Supp. at 113-15. Because the only alleged injuries in this case were excessive interest payments resulting from the underlying fraud, the district court dismissed the RICO counts. The district court did not suggest what additional injuries might satisfy section 1964(c).

At the outset we should avoid confusion by distinguishing a "racketeering injury" from the elements of a RICO cause of action spelled out explicitly in the statute. There can be no doubt that to state a claim under RICO, a civil plaintiff must allege more than the occurrence of two predicate acts of racketeering from the list in section 1961. The elements of a civil RICO claim are set forth in sections 1964(c) and 1962. The plaintiff must allege an injury to "business or property," and that injury must be "by reason of a violation of section 1962." 18 U.S.C. Sec. 1964(c). In this case we are concerned only with the conduct prohibited by subsection (c) in section 1962, and not with the provisions of subsections (a), (b) or (d). To allege a violation of section 1962(c), the plaintiff must allege that the defendant (1) was employed by or associated...