Allum v. Valley Bank of Nevada
| Decision Date | 24 March 1993 |
| Docket Number | No. 23394,23394 |
| Citation | 109 Nev. 280,849 P.2d 297 |
| Parties | , RICO Bus.Disp.Guide 8270 Robert L. ALLUM, Appellant, v. VALLEY BANK OF NEVADA, Valley Capital Corporation, Valley Mortgage Company, Kenneth Callahan, Arthur Daniel Ryssman and Perry DiLoreto, Respondents. |
| Court | Nevada Supreme Court |
FACTS
Valley Mortgage Company ("VMC") employed Robert L. Allum ("Allum") as a loan officer. 1 VMC and the other defendants engaged in an illegal loan scheme involving "D.E. Program" loans which Allum would underwrite in the course of his duties as an FHA underwriter. VMC's loan scheme obtained investors' money by false pretenses because the loans did not comport with FHA guidelines as investors believed.
Allum, because his duty was to underwrite the D.E. Program loans, believed he was liable for them. Allum attempted to internally resolve the illegal activity by informing VMC's head FHA underwriter and other VMC officers of the practice. In spite of Allum's efforts, VMC continued the illegal activity. In July 1989, Allum reported the activity to the FHA. VMC officers then engaged in a cover-up and subsequently conspired to and did terminate Allum's employment.
Allum sued, alleging violations of Nevada RICO, 2 defamation, and wrongful termination. Throughout this litigation, Allum has claimed as damages his lost income following his wrongful termination. The district court dismissed Allum's Nevada RICO claim without prejudice on the ground that Allum had not been injured by a "predicate act"; that is, an act expressly prohibited by Nevada RICO.
Allum filed an amended complaint alleging the same three causes of action. Finding that Allum's FHA underwriting status did not qualify him as a "public officer" under NRS 207.400(1)(g), the district court again dismissed Allum's Nevada RICO claim without prejudice.
In his second amended complaint, Allum alleged that the defendants conspired to violate NRS 207.360(26), which then proscribed as a predicate Nevada RICO act obtaining money or property valued at $100 or more by false pretenses. Allum also alleged a violation of NRS 207.400(1)(g), which prohibits inducing the commission or omission of an act by a public officer in violation of his official duty. The district court again dismissed Allum's Nevada RICO claim, this time with prejudice. Allum appealed.
Allum contends that the district court erred by dismissing his Nevada RICO claim without leave to amend. We conclude that under these facts Allum has failed to state--and is unable to state--a claim upon which relief can be granted. Thus, we affirm the district court's judgment.
Nevada RICO not only provides for criminal sanctions 3 against those who violate its provisions, but also provides a private civil action to recover treble damages for injuries caused by a violation of its substantive provisions. A potent provision, NRS 207.470(1), provides:
Any person who is injured in his business or property by reason of any violation of NRS 207.400 has a cause of action against a person causing such injury for three times the actual damages sustained. An injured person may also recover attorney's fees in the trial and appellate courts and costs of investigation and litigation reasonably incurred.... Any injured person has a claim to forfeited property or the proceeds derived therefrom and this claim is superior to any claim the state may have to the same property or proceeds if the injured person's claim is asserted before a final decree is issued....
NRS 207.400 provides:
Unlawful acts; criminal penalties.
1. It is unlawful for any person:
(a) Who has with criminal intent received any proceeds derived, directly or indirectly, from racketeering activity to use or invest, whether directly or indirectly, any part of the proceeds, or the proceeds derived from the investment or use thereof, in the acquisition of:
(1) Any title to or any right, interest or equity in real property; or
(2) Any interest in or the establishment or operation of any enterprise.
(b) Through racketeering activity to acquire or maintain, directly or indirectly, any interest in or control of any enterprise.
(c) Who is employed by or associated with any enterprise to conduct or participate, directly or indirectly, in:
(1) The affairs of the enterprise through racketeering activity; or
(2) Racketeering activity through the affairs of the enterprise.
(d) Intentionally to organize, manage, direct, supervise or finance a criminal syndicate.
(e) Knowingly to incite or induce others to engage in violence or intimidation to promote or further the criminal objectives of the criminal syndicate.
(f) To furnish advice, assistance or direction in the conduct, financing or management of the affairs of the criminal syndicate with the intent to promote or further the criminal objectives of the syndicate.
(g) Intentionally to promote or further the criminal objectives of a criminal syndicate by inducing the commission of an act or the omission of an act by a public officer o[r] employee which violates his official duty.
(h) To conspire to violate any of the provisions of this section.
2. Any person who violates this section shall be punished by imprisonment in the state prison for not less than 5 years nor more than 20 years, and may be further punished by a fine of not more than $25,000.
Having reviewed the Nevada statutory scheme as well as federal court interpretations of RICO, we conclude that for a plaintiff to recover under Nevada RICO, three conditions must be met: (1) the plaintiff's injury must flow from the defendant's violation of a predicate Nevada RICO act; (2) the injury must be proximately caused by the defendant's violation of the predicate act; and (3) the plaintiff must not have participated in the commission of the predicate act.
It is well-settled that to have standing as a RICO plaintiff, one's injury must flow from the violation of a predicate RICO act. 4 Cf. Hale v. Burkhardt, 104 Nev. 632, 764 P.2d 866 (1988). Allum originally alleged that VMC violated NRS 207.360(26), which then provided that " 'Crime related to racketeering' means the commission of, attempt to commit or conspiracy to commit ... [o]btaining possession of money or property valued at $100 or more ... by means of false pretenses." This crime, alleged Allum, was perpetrated against "investors seeking FHA quality loans." Crucially the crime was not committed against Allum.
This issue has been addressed by numerous courts reviewing alleged violations of RICO. Indeed, the context of virtually every Court of Appeals decision cited in footnote 4, supra, was wrongful termination. Further, those cases arose following successful motions to dismiss. Because one of those cases, Reddy v. Litton Indus. Inc., 912 F.2d 291 (9th Cir.1990), is especially helpful in gaining an understanding of the issue at hand, a review of that case follows.
Reddy was employed by Litton Industries, Inc. ("Litton") which was engaged in selling military hardware to Saudi Arabia. Reddy discovered an unlawful payment scheme between Litton and certain Saudi officials. Reddy reported the scheme to his superiors, who thereafter terminated Reddy's employment. Reddy sued Litton, alleging that he was wrongfully terminated because he refused to cover-up the illegal activity. Litton moved to dismiss for failure to state a claim. The federal district court found that Reddy lacked standing and granted Litton's motion with prejudice. Reddy appealed. Reddy, 912 F.2d at 292-93.
The United States Court of Appeals for the Ninth Circuit affirmed. After noting that only harm caused by a predicate RICO act was compensable, the court stated:
All of the circuit courts that have considered this issue have held that an employee who is wrongfully discharged for refusing to participate in an alleged pattern of racketeering activity lacks standing to sue under § 1962(c)....
Accordingly, we hold that Reddy lacks standing to sue under § 1962(c) because the injury he suffered was the result of his alleged wrongful termination and was not caused by predicate RICO acts.
Like the plaintiff in Reddy, Allum's injury flowed from his wrongful termination. Wrongful termination, however, is not a predicate Nevada RICO act. Allum therefore lacks standing to sue under NRS 207.470(1).
To recover under RICO, not only must the plaintiff's injury flow from a predicate act, but the plaintiff must show that the defendant's RICO violation proximately caused the plaintiff's injury. The most recent pronouncement in this area was made in Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992).
Holmes dealt with damages suffered by the Securities Investor Protection Corporation ("SIPC"). In 1970, Congress authorized the formation of SIPC by enacting the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa-78111. SIPC is a private nonprofit corporation of which most broker-dealers registered under § 15(b) of the Securities Exchange Act are required to join. Should SIPC determine that a member is unable to meet its obligations to its customers, SIPC may seek a "protective decree" in federal district court. Upon granting the petition, the district court appoints a trustee charged with liquidating the member's business. Holmes, 503 U.S. at ----, 112 S.Ct. at 1314.
The trustee first returns all securities to their registered owners. Securities not registered to a customer are pooled together and divided ratably to satisfy customers' claims. Should the amount in the pool be inadequate to cover the claims, SIPC must advance up to $500,000 per customer to satisfy those claims. Id.
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