834 F.2d 1297 (7th Cir. 1987), 86-3001, Liquid Air Corp. v. Rogers
|Docket Nº:||86-3001, 86-3046.|
|Citation:||834 F.2d 1297|
|Party Name:||LIQUID AIR CORPORATION, Plaintiff-Appellee, v. Jack R. ROGERS, George Michlik and D & R Welding Supply Company, an Illinois Corporation, and Raymond E. Bridges and Bridges Welding Supply & Therapy, Inc., Defendants-Appellants.|
|Case Date:||November 13, 1987|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued June 2, 1987.
As Amended on Denial of Rehearing and Rehearing En Banc Dec. 10, 1987.
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Frank H. Byers, II, Byers, Byers & Greenleaf, Ltd., William A. McNutt, Lowe, Moore, Susler, McNutt & Wrigley, Decatur, Ill., for defendants-appellants.
William G. Schopf, Jr., Schopf & Weiss, Chicago, Ill., for plaintiff-appellee.
Before BAUER, Chief Judge, COFFEY, Circuit Judge, and ESCHBACH, Senior Circuit Judge.
BAUER, Chief Judge.
This case raises several issues with respect to civil enforcement of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1962 ("RICO"), including (1) what standard of proof should govern civil RICO actions; (2) whether a series of fraudulent acts in a single scheme, with a single victim, satisfies RICO's requirement of a "pattern of racketeering activity;" (3) to what degree may vicarious liability be imposed under civil RICO; (4) the appropriate measure of damages under RICO; and (5) whether any set-off should be subtracted before or after trebling the damage award under RICO. D & R Welding Supply Company ("D & R") leased compressed gas cylinders from Liquid Air Corporation ("Liquid Air"). Through a series of fraudulent shipping orders, D & R made it appear that it had returned over 3,000 cylinders to Liquid Air. A jury found all defendants guilty of civil RICO and pendent state torts. In addition to the RICO issues, defendants challenge the sufficiency of the evidence, various evidentiary rulings and various jury instructions. For the reasons that follow, we affirm the judgment entered in all respects.
D & R is an Illinois corporation in which two of the shareholders are Jack R. Rogers and George Michlik. D & R operates out of Decatur, Streator and Urbana, Illinois and is involved in interstate commerce. Among other supplies, it distributed compressed gas. In order to distribute the gas, D & R leased both compressed gas and compressed gas cylinders from Liquid Air. As a result of price increases, D & R gave notice that it would terminate its distributorship with Liquid Air, effective September, 1981. Under its Distributor Agreement with Liquid Air, D & R was required to return leased gas cylinders to Liquid Air, pay rent on outstanding cylinders and pay the replacement value for any cylinders not returned or accounted for. The monthly rental fee then in effect was $2.25 per cylinder; the average replacement cost per cylinder was $150.
D & R was slow in returning the cylinders after it terminated its distributorship. By August, 1982, D & R had returned only 1,570 of 5,000 outstanding cylinders. At this point, Liquid Air began to charge D & R its higher, nondistributor rental rate. Just after Liquid Air raised its rate, Michlik and Rogers became more creative in their business dealings. They enlisted the aid of Ray Bridges, an employee of Liquid Air responsible for handling all paperwork at Liquid Air's Peoria Distribution Center. Under the scheme, Bridges would falsify documents so that it would appear that D & R had returned all outstanding cylinders. D & R would thus save the rental and replacement fees while retaining the cylinders for its own use. The scheme was accomplished through nineteen separate falsified shipping orders documenting returns that had never been made. Each shipping order involved using the mails twice and one wire transfer.
In return for Bridges's "work", Michlik and Rogers arranged to set Bridges up in his own welding business in Peoria. They supplied Bridges with personnel, capital and welding products. Michlik and Rogers derived an additional benefit from this pay-off to the scheme. Michlik and Rogers were prevented from openly expanding their business into Peoria because of a non-competition agreement with A. W. Moore Welding in Peoria ("Moore Welding"). By setting Bridges up in the welding business in Peoria, Michlik and Rogers could not only bilk Liquid Air of its cylinders, but could also circumvent the non-competition agreement through their participation in Bridges Welding.
In August, 1983, Liquid Air employee Lauren "Bud" Sage became suspicious after hearing that Ray Bridges was seen removing Liquid Air cylinders from the Liquid Air Peoria Distribution Center, supposedly with Sage's okay. Sage initiated an investigation to determine whether D & R had actually returned the cylinders it had leased from Liquid Air. Sage compared Liquid Air's inventory of cylinders on paper to the physical inventory taken in Peoria for July, 1983. The comparison revealed a discrepancy of 3,307 cylinders between those that Liquid Air actually possessed and those that its internal documents registered.
On April 4, 1984, Liquid Air filed a five-count complaint against Michlik, Rogers, D & R, Ray Bridges and Bridges Welding Supply ("Bridges Welding"), which was amended in September, 1984 to include two additional counts. The complaint charged separate RICO violations of 18 U.S.C. Sec. 1962(a), (b), (c) and (d) (Counts I & II, III and IV); conversion (Count V); breach of fiduciary duty by Ray Bridges (Counts VI and IX); inducement to breach a fiduciary relationship by Michlik, Rogers and D & R (Count VII); and conversion of miscellaneous business supplies by Ray Bridges and Bridges Welding (Count VIII). The predicate acts for the RICO counts were mail fraud, 18 U.S.C. Sec. 1341, and wire fraud, 18 U.S.C. Sec. 1343.
The ensuing jury trial lasted approximately two and one-half weeks. The jury found against all the defendants on the RICO counts and on one count of conversion. In addition, the jury found that Ray Bridges had breached his fiduciary duty to Liquid Air in participating in the scheme and that Michlik, Rogers and D & R had induced the breach. The jury returned a verdict for defendant Ray Bridges on the breach of fiduciary duty and conversion associated with the miscellaneous missing business supplies. The jury assessed $750,000 in compensatory damages on all four RICO counts. 1 On the conversion count, the jury assessed $350,000 in actual damages and punitive damages in the following amounts: $25,000 against D & R; $15,000 against Bridges Welding; $10,000 against Rogers; $10,000 against Michlik; and $5,000 against Bridges. On the claim that Ray Bridges had breached his fiduciary duty, the jury assessed $4,000 in actual damages and $1,000 in punitive damages against Ray Bridges. For inducing Ray Bridges to breach his fiduciary duty, the jury assessed $750,000 in actual damages and $10,000 each in punitive damages against D & R, Michlik and Rogers. Sometime after the trial, the defendants returned 530 Liquid Air cylinders and the court ordered that the rental and replacement value of the 530 cylinders be subtracted from the total trebled damage award.
Defendants charge numerous bases for overturning the jury verdicts, which may be grouped as follows: (1) whether the district court used the proper standard of proof; (2) whether the evidence supports a finding that defendants engaged in a "pattern of racketeering activity;" (3) whether conspiracy is a proper basis for civil liability; (4) whether Bridges Welding was properly found vicariously liable for conversion or RICO; (5) whether the evidence was sufficient to support the adverse jury verdicts; (6) objections to various evidentiary rulings; (7) objections to various jury instructions; (8) damages. We address each of defendants' arguments in turn.
The Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. Secs. 1961-1968 ("RICO"), was designed to prevent organized crime from gaining a stronghold in legitimate businesses. Statement of Findings and Purpose, Organized Crime Control Act of 1970, Pub.L. 91-452, 84 Stat. 922, 922-23 (1970). The Act prohibits various forms of infiltration of legitimate business "enterprises" involved in interstate commerce through a "pattern of racketeering
activity." 18 U.S.C. Sec. 1962. Section 1964 of the Act provides for civil suits arising out of Sec. 1962 RICO violations.
Standard of Proof
Defendants argue that civil RICO proceedings are quasi-criminal in nature, and that the court therefore should have imposed a higher standard of proof than a mere preponderance of the evidence. In Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court left undecided the question of the proper standard of proof to be used in civil RICO cases. Id. at 491, 105 S.Ct. at 3282-83. Still, there is a strong suggestion in Sedima that the appropriate standard of proof in civil RICO is proof by a preponderance of the evidence. The court noted:
We are not at all convinced that the predicate acts must be established beyond a reasonable doubt in a proceeding under Sec. 1964(c). In a number of settings, conduct that can be punished as criminal only upon proof beyond a reasonable doubt will support civil sanctions under a preponderance standard.
Id. Since Sedima, many lower courts have addressed the issue and have reached the conclusion that proof by a preponderance of the evidence is sufficient to establish a civil violation of section 1962. See Wilcox v. First Interstate Bank of Oregon, 815 F.2d 522, 531 (9th Cir.1987); Cullen v. Margiotta, 811 F.2d 698, 731 (2d Cir.), cert. denied, 476 U.S. 1140, 107 S.Ct. 3266, 97 L.Ed.2d 764 (1987); Armco...
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