Citizens Sav. Ass'n v. Franciscus

• Decision Date: 30 December 1986
• Docket Number: Civ. No. 85-1892.
• Citation: 656 F. Supp. 153
• Parties: CITIZENS SAVINGS ASSOCIATION, on its own behalf and derivatively; Colonial Savings Association, on its own behalf and derivatively; W-C Service Corporation, on its own behalf and derivatively; and Citizens Savings Association, as successor in interest by way of merger on behalf of Citizens Savings Association and Colonial Savings Association, Plaintiffs, v. Barry N. FRANCISCUS; Vivian K. Spiese, Executrix of the Estate of Lloyd Kline, deceased; Mary B. Rothrock; Grover C. Artman; Frederic P. Bromer; Albert H. Spinner; Linda S. Kauffman; James I. Bovender; D. Clyde Long; Preston L. Horn; William Logeman; Guy U. Sheffer; Charles C. Dietz; John M. Boddington; Grover Fred Artman, II; McKonly & Co.; and McKonly & Asbury, Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

656 F. Supp. 153

CITIZENS SAVINGS ASSOCIATION, on its own behalf and derivatively; Colonial Savings Association, on its own behalf and derivatively; W-C Service Corporation, on its own behalf and derivatively; and Citizens Savings Association, as successor in interest by way of merger on behalf of Citizens Savings Association and Colonial Savings Association, Plaintiffs, v. Barry N. FRANCISCUS; Vivian K. Spiese, Executrix of the Estate of Lloyd Kline, deceased; Mary B. Rothrock; Grover C. Artman; Frederic P. Bromer; Albert H. Spinner; Linda S. Kauffman; James I. Bovender; D. Clyde Long; Preston L. Horn; William Logeman; Guy U. Sheffer; Charles C. Dietz; John M. Boddington; Grover Fred Artman, II; McKonly & Co.; and McKonly & Asbury, Defendants.

Civ. No. 85-1892.

United States District Court, M.D. Pennsylvania.

December 30, 1986.

Andrew Hailstone, Bruce L. Morgan, Henkelman, Kreder, O'Connell & Brooks, Scranton, Pa., for plaintiffs.

James M. Scanlon, Scanlon, Howley, Scanlon & Doherty, Scranton, Pa., for McKonly & Co. McKonly & Asbury.

Bruce E. Cooper, Harrisburg, Pa., for Franciscus, Rothrock, Artman, Bromer, Spinner, Kauffman, Bovender, Long, Horn, Logeman, Sheffer, Dietz & Artman, II.

Gwendolyn Mosley, Dist. Atty. Gen., Andrew S. Gordon, Dist. Atty., Office of Atty. Gen., Litigation Section, Harrisburg, Pa., for Pa. Dept. of Banking.

John P. Hohenadel, Lancaster, Pa., for Vivian K. Spiese.

MEMORANDUM AND ORDER

NEALON, Chief Judge.

Plaintiffs instituted this action on December 30, 1985. The named defendants were allegedly officers and directors of Colonial Savings Association ("Colonial"), accountants for Colonial and the state regulatory agency¹ for banking. Plaintiffs averred that Citizens Savings Association ("Citizens") and Colonial merged on December 29, 1983 and that Citizens subsequently discovered delinquencies and related problems with regard to certain "nationwide" loans.² Plaintiffs claimed that defendants violated the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., by fraudulently misrepresenting the status of the nationwide loans during merger negotiations. Specifically, plaintiffs maintained that defendants committed indictable offenses under 18 U.S.C. § 1341 (mail fraud) and 18 U.S.C. 1343 (wire fraud). Plaintiffs also asserted various pendent claims based upon state law.

On September 19, 1986, defendants Franciscus, Rothrock, Grover C. Artman, Bromer, Spinner, Kauffman, Bovender, Long, Horn, Logeman, Sheffer, Dietz, Boddington and Grover Fred Artman, II filed a Motion for Summary Judgment, a Statement of Material Facts Presenting No Genuine Issue for Trial and a Brief in Support of their dispositive motion. Said defendants also submitted a Memorandum on October 6, 1986. They asserted in their Statement of Material Facts and in attached affidavits that defendants Boddington and Grover Fred Artman, II were never officers or directors of Colonial as averred in plaintiff's Complaint and are thus not proper defendants in this action. In addition, they maintained that "plaintiffs have no evidence to support the charges that each of the Defendants herein was guilty of two acts of racketeering activity." See defendants' Statement of Material Facts at ¶ 11.

These defendants reiterated the latter proposition in their Brief in Support of their summary judgment motion when they stated:

With respect to the officers and directors other than Franciscus, Plaintiffs have no evidence. Despite the detailed nature of the Interrogatories served upon them, Plaintiffs have failed to supply facts as to what representations were made, the specific manner in which the representations were false and the facts that support an inference of fraud by each Defendant. The Plaintiffs are required to show the nature of each individual Defendant's participation in the alleged fraud including facts which constitute scienter. They must show which documents were fraudulent and how. There is absolutely no indication regarding the roles of the various Defendants in the preparation and dissemination of information and how such information was fraudulent (citation omitted).

Not a single representation or omission is attributed to these Defendants, much less a date on which the representations or omissions occurred.... Defendants are grouped together indiscriminately with an inference that each Defendant is responsible for the acts of the others.

See Document 28 of the record at p. 13. Defendants further argued that plaintiffs failed to plead fraud with particularity, to aver the element of enterprise, to plead a pattern of racketeering with specificity and to identify the subsections of 18 U.S.C. § 1962 upon which their RICO claim is based. A main theme of defendants' argument was that plaintiffs should not be allowed to institute a RICO action without any basis for it and then attempt to search for a basis through discovery. Defendants also requested sanctions under Rule 11.

Plaintiffs filed a Brief in Opposition to defendants' dispositive motion on October 17, 1986. They indicated that the predicate acts upon which they based their RICO claim were the transmission by mail of a series of reports, prepared by defendant Kauffman, to the Federal Home Loan Bank Board as well as a series of reports by defendant Franciscus to Citizens during merger negotiations. Plaintiffs submitted affidavits which detailed the alleged misrepresentations contained in the above-noted reports. Finally, they argued that defendants' summary judgment motion was premature since plaintiffs' interrogatories and requests for production of documents are still outstanding.

Defendants submitted a Reply Brief on October 29, 1986. They reiterated their position as presented in their earlier brief, adding that the matters set forth in their Statement of Material Facts should be deemed admitted under Local Rule 401.4 since plaintiffs did not contest said Statement.

Meanwhile, defendant Spiese, executrix of the estate of Lloyd Kline, filed a Motion for Summary Judgment, a Brief in Support thereof and a Statement of Material Facts on October 3, 1986. She incorporated the summary judgment motion and supporting briefs of her fellow defendants and added that she was insulated from liability in this action because Mr. Kline's estate had been closed on March 20, 1984. Plaintiffs submitted a responsive Statement of Material Facts, a Brief in Opposition and an Affidavit on October 17, 1986.

This matter is now ripe for disposition. The court will deny defendants' summary judgment motions.³

DISCUSSION

When examining a motion for summary judgment, the court must view all facts in the light most favorable to the party opposing the motion. Betz Laboratories, Inc. v. Hines, 647 F.2d 402 (3d Cir.1981). If there exists a genuine issue as to any material fact, summary judgment must be denied. Fed.R.Civ.P. 56(c). Against this background, the court will examine the requisite elements for establishing a "pattern of racketeering activity" under 18 U.S.C. § 1962.⁴

The definitional section of RICO provides that a pattern of racketeering "requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5). The Supreme Court further defined the pattern requirement 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 Court stated:

The implication is that while two acts are necessary, they may not be sufficient. Indeed, in common parlance two of anything do not generally form a "pattern." The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern. As the Senate Report explained: `The target of RICO is thus not sporadic activity. The infiltration of legitimate business normally requires more than one "racketeering activity" and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.' S.Rep. No. 91-617, p. 158 (1969) (emphasis added). Similarly, the sponsor of the senate bill, after quoting this portion of the Report, pointed out to his colleagues that `the term "pattern" itself requires the showing of a relationship.... So, therefore, proof of two acts of racketeering activity, without more, does not establish a pattern....' 116 Cong.Rec. 18940 (1970) (statement of Rep. Poff) (RICO `not aimed at the isolated offender'); House Hearings, at 665. Significantly, in defining `pattern' in a later provision of the same bill, Congress was more enlightening: `criminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.' 18 U.S.C. § 3575(e). This language may be useful in interpreting other sections of the Act. Cf. Iannelli v. United States, 420 U.S. 770, 789, 95 S.Ct. 1284, 1295, 43 L.Ed.2d 616 (1975).

Id. 105 S.Ct. at 3285 n. 14.

Courts have widely differed in their interpretations of the Supreme Court's "continuity plus relationship" test for a pattern of racketeering.⁵ Some courts have held that a RICO violation requires two separate schemes, episodes or transactions⁶ involving criminal activity; others have ruled that two related acts which arise out of the same scheme may establish a pattern of racketeering.

The post-Sedima dichotomy over what constitutes a pattern of racketeering activity has risen to the forefront of this case, and the parties have concentrated upon this issue in their briefs. For example, defendants stated, "The fact that there may have been numerous misrepresentations in connection with this single transaction, the merger of Citizens with Colonial would not create a pattern under RICO." See Document 28 at p. 16. Defendants later added, "Even had the Plaintiffs been able to establish that each of the Defendants had actually been engaged...