Reynolds v. East Dyer Development Co.
| Citation | 882 F.2d 1249 |
| Parties | , RICO Bus.Disp.Guide 7287 Thomas REYNOLDS and Ruthann Reynolds, Plaintiffs-Appellants, v. EAST DYER DEVELOPMENT COMPANY, 545 Service Corporation, Citizens Development Corporation, Home Owners Warranty Corporation, Andrew J. Kopko, Individually and as a Trustee under Trust dated |
| Decision Date | 12 January 1977 |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
David M. Austgen, Robert E. Stochel, O'Drobinak, Stochel and Austgen, Crown Point, Ind., for plaintiffs-appellants.
Mark E. Schmidtke, Larry G. Evans, Hoeppner, Wagner & Evans, Valparaiso, Ind., for defendants-appellees.
Before FLAUM and MANION, Circuit Judges, and ESCHBACH, Senior Circuit Judge.
Citizens Development Corporation (Citizens), a subsidiary of Citizens' Federal Savings and Loan of Matteson, Illinois, and 545 Service Corporation (545), a subsidiary of First Federal Savings and Loan of Gary, Indiana, formed a joint venture called the East Dyer Development Company (East Dyer) to develop a residential subdivision known as Castlewood Subdivision in Dyer, Indiana. The Castlewood properly was held in a land trust, with Andrew J. Kopko as trustee. Thomas Jacobs sold lots in Castlewood, and generally managed the subdivision.
In the summer of 1982, Thomas and Ruthann Reynolds were looking for a new home or a site to build a new home. The Reynolds found out about Castlewood, visited the subdivision, and noticed a model home that interested them. The Reynolds eventually made a contingent offer to buy the home from its builder, Waggoner Builders, Inc. (Waggoner Builders, Inc. was owned by Ken Waggoner; we will refer to the corporation as Waggoner Builders, and to Ken Waggoner as Waggoner). The contingency did not come to pass, however, and the deal fell through.
The Reynolds were still interested in obtaining a house in Castlewood, and eventually agreed to allow Waggoner to build a house similar to the model house. Waggoner contracted with East Dyer to buy lot 96 in Castlewood as the home site. The Reynolds then contracted with Waggoner to purchase the completed house and lot.
While digging the foundation for the Reynolds' home, Waggoner encountered soft soil that was not suitable for building. Waggoner then investigated to determine if there was any other soft soil where he was going to lay the home's foundation, and found no more bad spots. Waggoner explained the problem to Mr. Reynolds, telling him that he could cure the problem by digging out the soft soil and filling the hole with rock. Mr. Reynolds, satisfied with Waggoner's explanation of the problem, allowed Waggoner to continue with construction.
After Waggoner Builders finished building the Reynolds' home, East Dyer deeded lot 96 to Waggoner Builders. Waggoner Builders then immediately deeded lot 96 and the completed home to the Reynolds. But all was not well. Shortly after moving into the home, the Waggoners began to experience problems with the home (for example, cracks in the walls). There is evidence in the record to support an inference that soft soil under the foundation caused the defects in the Reynolds' house.
The Reynolds filed a suit against various defendants (including the defendants in this case) in state court in Indiana. In 1987, while the state case was pending, the Reynolds sued East Dyer, 545, Citizens, Kopko, and John and Jane Doe (the unknown beneficiaries of the land trust) for treble damages in federal court, under RICO, 18 U.S.C. Sec. 1964. The federal suit also alleged various state-law claims. 1 The Reynolds alleged that the defendants received reports of soil boring tests that showed that sixteen lots in Castlewood, including lot 96, had soil unsuitable for building, and that the defendants committed fraud by not disclosing the report before selling lot 96.
The Reynolds' original complaint alleged RICO violations in two counts. The district court dismissed that complaint, with leave to amend, holding that the first RICO count failed to allege any predicate offenses, and that the second RICO count did not meet Fed.R.Civ.P. 9(b)'s requirement that the complaint particularly set forth the circumstances constituting fraud, or allege any pattern of racketeering activity. Having dismissed the RICO counts, the district court dismissed the pendent state-law claims as well. Additionally, the court ordered Rule 11 sanctions against the Reynolds' attorney, John M. O'Drobinak. According to the court, the complaint "made no semblance of compliance with Rule 9(b);" therefore, the "only reasonable conclusion" the court could draw was that O'Drobinak did not investigate the law regarding civil RICO pleading before filing the complaint.
The Reynolds filed an amended complaint, in which they attempted to beef up their RICO allegations. But even the amended complaint left much to be desired. For one thing, the amended complaint was woefully unclear about what the enterprise was, and about the defendants' conduct relating to the enterprise. For another, the amended complaint neglected to mention exactly what section of RICO the defendants allegedly violated. These two details are related, and important. The essence of a RICO violation is a defendant's conduct in relation to an enterprise. 18 U.S.C. Sec. 1962(a) makes it unlawful to invest income derived from a pattern of racketeering in an enterprise. Section 1962(b) makes it unlawful to acquire or maintain an interest in an enterprise through a pattern of racketeering activity. And Section 1962(c) makes it unlawful to conduct or participate in an enterprise's affairs through a pattern of racketeering activity. Moreover, the different RICO sections require plaintiffs to prove different things. For example, under Sec. 1962(c), the plaintiff must show that the enterprise and the defendant are different entities; under Sec. 1962(a), however, the defendant may be the enterprise. Haroco, Inc. v. American National Bank and Trust Co. of Chicago, 747 F.2d 384, 400-02 (7th Cir.1984), aff'd, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). Thus, it is essential to plead precisely in a RICO case the enterprise alleged and the RICO section allegedly violated. As the district court noted, these pleading deficiencies were inexcusable in light of the original complaint's dismissal for lack of specificity and the accompanying Rule 11 sanctions.
The district court, however, did not dismiss the amended complaint for failing to allege adequately the enterprise and the RICO section the Reynolds were suing under. The court treated statements in the Reynolds' response to the defendants' summary judgment motion as amendments to the complaint; consequently, the court treated the Reynolds' suit as one under Sec. 1962(c), and considered the enterprise to be an "association in fact" between all the defendants, see 18 U.S.C. Sec. 1961(4). (The Reynolds seem to accept these conclusions, so we do too.) But the district court went on to grant summary judgment for the defendants on a number of different grounds, which we need not catalogue. The Reynolds appeal, but we agree with the district court that summary judgment was appropriate.
First, we do not think the Reynolds have shown any racketeering activity in this case. RICO defines racketeering activity as a violation of a long list of federal and state laws. See 18 U.S.C. Sec. 1961(1). This list includes mail and wire fraud, and the Reynolds contend that the defendants violated RICO by engaging in a series of mail and wire frauds. However, to show that somebody committed mail or wire fraud, a plaintiff must show a "scheme or artifice to defraud" within the meaning of those statutes. See 18 U.S.C. Secs. 1341 and 1343.
The Reynolds have not alleged or shown that the defendants lied to them--or anybody else--about soil conditions in Castlewood. This case, then, essentially involves a failure by the defendants to disclose the results of the soil boring reports to the Reynolds (and some other buyers) before selling lots to them. The Reynolds allege that this was unethical conduct, failing " 'to match the reflection of moral uprightness, of fundamental honesty, fair play and right feeling in the general and business life of the members of society,' " and thus constitutes fraud for purposes of the wire and mail fraud statutes. Blachly v. United States, 380 F.2d 665, 671 (5th Cir.1967); see also United States v. Lindsey, 736 F.2d 433, 436 (7th Cir.1984); United States v. Keplinger, 776 F.2d 678, 698 (7th Cir.1985).
This circuit, however, has cautioned that the broad language in cases like Blachly and Lindsey "cannot have been intended, and must not be taken literally." United States v. Holzer, 816 F.2d 304, 309 (7th Cir.1987), vacated on other grounds, 484 U.S. 807, 108 S.Ct. 53, 98 L.Ed.2d 18 (1987). Not all conduct that strikes a court as sharp dealing or unethical conduct is a "scheme or artifice to defraud." Id.; see also United States v. Dial, 757 F.2d 163, 170 (7th Cir.1985). Given the pervasive use of the mails and of telephone and related services in the business world, along with the ease of satisfying the mailing or wiring requirement, see, e.g., Schmuck v. United States, --- U.S. ----, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989), such a broad meaning of fraud for the mail and wire fraud statutes "would put federal judges in the business of creating what in effect would be common law crimes, i.e., crimes not defined by statute." Holzer, 816 F.2d at 309.
The Reynolds have not cited any cases in which mere failure to disclose, absent something more, was held to be fraud under the mail and wire fraud statutes, even in spite of the broad language some of those cases use. See, e.g., Keplinger, 776 F.2d at 697-99 (...
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