Chisolm v. TranSouth Financial Corp.
| Decision Date | 10 September 1996 |
| Docket Number | No. 95-2629,95-2629 |
| Citation | 95 F.3d 331 |
| Parties | , RICO Bus.Disp.Guide 9115 Nora CHISOLM; Tina Wilce; Laura Richards, Plaintiffs-Appellants, and Starlette Seamster, Plaintiff, v. TRANSOUTH FINANCIAL CORPORATION, Defendant-Appellee, and Charlie Falk's Auto Wholesale Incorporated; JB Collection Corporation, Defendants, Carolyn L. Nolen; Geraldine B. Williams; Paul T. Kazmierski; Raymond L. Raasch; Ava Howington; Peter Gray; Janice M. Dixon; Brenda Powell; Timothy S. Booker, Claimants, Falk Finance, Incorporated; Charles Falk, Sr.; Charles Falk, Jr.; Katherine Falk; Anderson & Strudwick, Incorporated; Arthur Truman Goodson; Willa Jean Collins, Movants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: George Robert Blakey, University of Notre Dame, Notre Dame, Indiana, for Appellant. Gregory Neil Stillman, Hunton & Williams, Norfolk, Virginia, for Appellee. ON BRIEF: Kieron F. Quinn, F. Paul Bland, Jr., Law Office of Kieron Quinn, Baltimore, Maryland, for Appellant. Benjamin V. Madison, III, Hunton & Williams, Norfolk, Virginia, for Appellee.
Before HALL and MOTZ, Circuit Judges, and BUTZNER, Senior Circuit Judge.
Vacated and remanded with instructions by published opinion. Judge HALL wrote the opinion, in which Judge MOTZ and Senior Judge BUTZNER joined.
The appellants are three of four plaintiffs who filed a putative class action against appellee TranSouth Financial Corporation and others, seeking redress under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq., for damages they sustained as victims of a "revolving repossession" scheme. The district court entered a final judgment dismissing the action as to TranSouth under Fed.R.Civ.P. 12(b)(6), because the plaintiffs had failed to allege in their complaint that, following the repossession of their vehicles, they had relied to their detriment on the written notices of sale mailed to them by TranSouth.
In the wake of the judgment, the plaintiffs moved to amend their complaint, but the district court denied the motion because it believed that the plaintiffs could prove no set of facts establishing that they had relied on the mailings. We hold that the district court's denial of the plaintiffs' motion to amend was an abuse of its discretion; we thus vacate the court's judgment and remand with instructions to permit the amendment.
We review de novo the district court's dismissal of the plaintiffs' complaint under Rule 12(b)(6). Randall v. United States, 30 F.3d 518, 522 (4th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 1956, 131 L.Ed.2d 849 (1995). We must accept the well-pled allegations of the complaint as true, and we must construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiffs. Id.; Little v. Federal Bureau of Investigation, 1 F.3d 255, 256 (4th Cir.1993).
According to the complaint, TranSouth conspired with Charlie Falk's Auto Wholesale, Inc., and JB Collection Corporation, both of Norfolk, Virginia, to effect an automobile "churning" or revolving repossession scheme. Falk's sold used vehicles at inflated prices, offering to arrange financing at interest rates as high as thirty percent. Under the terms of the financing contracts, Falk's retained a security interest in the vehicles pending full repayment of the loan by the borrower. Falk's then assigned the secured notes to TranSouth, agreeing to buy back the notes for a fixed price--usually $1,000 to $1,500--in the event of the borrower's default.
If a borrower missed a payment, TranSouth had the vehicle repossessed. 1 It then mailed a "Notice of Private Sale," giving the borrower an opportunity to redeem the vehicle. 2 Any vehicles that were not redeemed were retransferred, with the accompanying notes, to Falk's for the prearranged consideration. 3
Upon repurchasing the notes, Falk's assigned them to JB, its wholly-owned subsidiary. JB then demanded payment from the borrowers for the "deficiency" between the loan balance and the price obtained by the "sale" of the vehicle, i.e., the retransfer price. If the borrower failed to pay, JB filed a deficiency action in state court for the stated amount. On occasion, JB also claimed attorney fees of twenty-five percent, notwithstanding that it had filed suit without the assistance of counsel.
While JB was trying to collect from the borrowers, Falk's resold the repossessed vehicles for about the same price as (or even more than) it had previously, starting the process all over again. The original borrowers were never notified of these subsequent, legitimate sales; the amount of the purchase price was not credited to the deficiencies, and the borrowers were not paid any resultant surplus. 4
On June 17, 1993, four victims of the scheme filed a complaint in the district court against Falk's, JB, and TranSouth. The complaint alleged that the three had violated various provisions of RICO, and that JB had failed to comply with the Fair Debt Collection Act, 15 U.S.C.A. § 1692 et seq. (West 1982). The plaintiffs also asserted state law claims against each defendant for violations of Virginia's Consumer Protection Act and its version of the Uniform Commercial Code, 5and for common law fraud and conspiracy.
The matter was referred by the district court to a magistrate judge to conduct hearings and make proposed findings. The magistrate judge issued his report and recommendation on November 19, 1993, wherein he concluded that the RICO claims should be dismissed (as to TranSouth) or judgment granted on the pleadings (as to Falk's and JB). See Fed.R.Civ.P. 12(b)(6), (c).
The magistrate judge further recommended that summary judgment be granted to JB on one plaintiff's FDCA claim, because the statute of limitations had expired. Lastly, the magistrate judge concluded that the state law claims against TranSouth should be dismissed without prejudice because no viable federal claim against it remained. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). The district court adopted the magistrate judge's proposed disposition. Chisolm v. Charlie Falk Auto Wholesalers, Inc., 851 F.Supp. 739 (E.D.Va.1994). On May 11, 1994, the court denied the plaintiffs' alternative motions for reconsideration or to amend the complaint.
On July 27, 1994, the plaintiffs settled with Falk's and JB as to the remaining FDCA and state law claims; a written "stipulation of settlement" was filed in the district court on October 13, 1994. On August 3, 1995, the court approved the settlement, and it dismissed the plaintiffs' claims against Falk's and JB with prejudice.
The accompanying order certified two classes for the purposes of settlement only. Under the terms of their agreement with the plaintiffs, Falk's and JB agreed to forgive approximately $10 million in deficiency judgments and to pay $400,000 to the class and its attorneys. The companies also agreed to conduct all future dispositions of repossessed automobiles in compliance with Virginia law. Final judgment having been entered in the matter, three of the plaintiffs now appeal the district court's dismissal of two of their four RICO claims against TranSouth.
The appellants maintain that TranSouth was more than just an unwitting participant in the scheme, and that its actions violated two distinct provisions of RICO: 18 U.S.C. §§ 1962(a) and (d). Subsection (a) provides, in pertinent part:
It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce....
Subsection (d) makes it a crime to conspire to violate any of the section's substantive provisions, including Subsection (a).
"Racketeering activity" refers to an assortment of crimes, one of which is federal mail fraud. See 18 U.S.C.A. § 1961(1) (West Supp.1996). A "pattern" requires, at a minimum, two acts of racketeering activity within ten years. 18 U.S.C.A. § 1961(5) (West 1984); Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985). The appellants assert that TranSouth committed mail fraud each time that it notified a defaulting borrower that his or her repossessed vehicle would, if not redeemed, be disposed of at a private "sale." According to the appellants, the notice was intentionally misleading because TranSouth knew that a transfer of collateral under a repurchase agreement was not a "sale" at all. See note 3, supra.
RICO provides that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor ... and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee...." 18 U.S.C.A. § 1964(c) (West Supp.1996). The government need not prosecute a RICO violation as a prerequisite to the filing of a civil suit against the alleged violator. Sedima, 473 U.S. at 493, 105 S.Ct. at 3283.
The elements of mail fraud are (1) a scheme disclosing an intent to defraud, and (2) the use of the mails in furtherance of the scheme. See Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 362, 98 L.Ed. 435 (1954). Although the crime of common law fraud requires the intended victim to have justifiably and detrimentally relied on the defendant's misrepresentation, no such "reliance" element must be proved to obtain a conviction for mail fraud. See Armco Indus. Credit Corp. v. SLT Warehouse Co., 782 F.2d 475, 481-82 (5th Cir.1986). Thus, assuming that TranSouth, through its agents, mailed the notice letters with...
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