Gentry v. Yonce

• Citation: 337 S.C. 1,522 S.E.2d 137
• Decision Date: 13 July 1999
• Docket Number: No. 24971.,24971.
• Court: United States State Supreme Court of South Carolina
• Parties: Mary GENTRY and Ralph Bryan, Appellants, v. Kenneth M. YONCE, d/b/a, Yonce's Stop N Shop; Shirley Fincher, formerly d/b/a, Star Stop N Shop; Walter M. Fulmer, d/b/a, Fulmer's Amoco; Joseph A. Rhinehart, d/b/a, Country Peddler and The Country Peddler; H & S Amusements, Inc.; William Gordon Silver and James Harold Matthews, d/b/a, H & S Amusements; and Willard Britton, d/b/a, Association Amusements, Respondents.

337 S.C. 1

522 S.E.2d 137

Mary GENTRY and Ralph Bryan, Appellants, v. Kenneth M. YONCE, d/b/a, Yonce's Stop N Shop; Shirley Fincher, formerly d/b/a, Star Stop N Shop; Walter M. Fulmer, d/b/a, Fulmer's Amoco; Joseph A. Rhinehart, d/b/a, Country Peddler and The Country Peddler; H & S Amusements, Inc.; William Gordon Silver and James Harold Matthews, d/b/a, H & S Amusements; and Willard Britton, d/b/a, Association Amusements, Respondents.

No. 24971.

Supreme Court of South Carolina.

Heard June 22, 1999.

Decided July 13, 1999.

Douglas H. Westbrook, of Charleston, for appellants.

James M. Griffin, of Simmons, Griffin & Lydon, of Columbia, for respondents.

Lawrence E. Richter, Jr., and Saul Gliserman, of The Richter Firm, of Mount Pleasant; and R. Randall Bridwell, of Columbia, all for Amicus Curiae Legacy Alliance.

Dwight F. Drake and B. Rush Smith, III, both of Nelson, Mullins, Riley & Scarborough, L.L.P.; and Richard A. Harpootlian, of the Law Offices of Richard Harpootlian, all of Columbia, for Amicus Curiae South Carolina Coin Operators Association.

MOORE, Justice:

Appellants brought this class action suit alleging causes of action under the Racketeer Influenced and Corrupt Organizations Act (RICO—18 U.S.C. § 1961 et seq.) and the Unfair Trade Practices Act (UTPA—S.C.Code Ann. § 39-5-20 et seq.).¹ Respondents are owners and operators of video poker machines located in Saluda and Newberry Counties. The trial court granted respondents' motion to dismiss the RICO and UTPA causes of action. We affirm in part and reverse in part.

ISSUES

1) Did the trial court err in dismissing the RICO claim?

2) Did the trial court err in dismissing the UTPA claim?

DISCUSSION

Initially, we note that in deciding a motion to dismiss pursuant to 12(b)(6), SCRCP, the trial court should consider only the allegations set forth on the face of the plaintiffs complaint and a 12(b)(6) motion should not be granted if "facts alleged and inferences reasonably deducible therefrom would entitle the plaintiff to any relief on any theory of the case." Stiles v. Onorato, 318 S.C. 297, 300, 457 S.E.2d 601, 602 (1995).² The question is whether, in the light most favorable to the plaintiff, and with every doubt resolved in his behalf, the complaint states any valid claim for relief. Further, the complaint should not be dismissed merely because the court doubts the plaintiff will prevail in the action. Toussaint v. Ham, 292 S.C. 415, 357 S.E.2d 8 (1987). See also Kennedy v. Henderson, 289 S.C. 393, 346 S.E.2d 526 (1986)

(where there is cause for doubt, or it is clear that the ends of justice may well be promoted by a trial on the merits, a demurrer should be denied where novel issues are present or are involved); Springfield v. Williams Plumbing Supply Co., 249 S.C. 130, 153 S.E.2d 184 (1967).

1) RICO claim

Respondents moved to dismiss the RICO claim on the grounds that appellants: failed to state sufficient facts to constitute a cause of action; failed to plead fraud with particularity; lacked standing because the injuries complained of were not proximately caused by any alleged RICO violation; and failed to plead the RICO claim with the particularity required pursuant to Rule 9(b), SCRCP.

The circuit court dismissed the RICO cause of action on the ground that complaints alleging RICO violations are subject to the same stringent pleading requirements applicable to fraud claims. The circuit court also held appellants failed to plead the existence of two "predicate acts" that constitute a "pattern of racketeering" as required by RICO.³

A) Pleading Requirements

The circuit court held that complaints alleging RICO violations are subject to the same stringent pleading requirements applicable to fraud claims pursuant to Rule 9(b), SCRCP.⁴ We disagree.

The circuit court cited three cases to support its conclusion that RICO actions are subject to the particularity pleading requirement of Rule 9(b). However, in each of these cases, the underlying predicate acts alleged in support of the RICO action were acts of fraud. Florida Dep't of Ins. v. Debenture Guar., 921 F.Supp. 750 (M.D.Fla.1996) (allegations of federal securities fraud); Grant v. Union Bank, 629 F.Supp. 570, 575 (D.Utah 1986) (allegations of mail and wire fraud); Crystal v. Foy, 562 F.Supp. 422 (S.D.N.Y.1983) (allegations of fraudulent conduct violating the Securities Exchange Act). Here, the underlying predicate acts alleged in support of the RICO cause of action are violations of S.C.Code Ann. § 12-21-2804(B) (Supp.1998) which prohibits the offering of special inducements⁵ and S.C.Code Ann. § 12-21-2804(A) (Supp. 1998) which prohibits businesses from receiving primary or substantial gross proceeds from video gaming devices. Thus, the alleged underlying predicate acts are not based in fraud.⁶

As respondents point out, some courts have specifically held that the same standard of particularity should be applied to all RICO claims. See, e.g. Plount v. American Home Assurance Co., 668 F.Supp. 204 (S.D.N.Y.1987)

; Schnitzer v. Oppenheimer & Co., 633 F.Supp. 92 (D.Or.1985); Taylor v. Bear Stearns & Co., 572 F.Supp. 667 (N.D.Ga.1983). However, contrary to the respondents' contention, the specificity requirement for pleading RICO claims is not well-settled. Many courts have not been persuaded by the reasoning of the courts that have applied Rule 9(b) to all RICO actions and have limited the application of Rule 9(b) to fraud-based RICO claims. See United States v. District Council of N.Y. City, 778 F.Supp. 738 (S.D.N.Y.1991); United States v. Bonanno Organized Crime Family, 683 F.Supp. 1411 (E.D.N.Y.1988); Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 792 n. 7 (3d Cir.1984),

cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). "Logically it follows, at least in most circuits, that when predicate acts are not based on fraud, there is no pleading requirement of particularity." 2 James Wm. Moore, Moore's Federal Practice § 9.03(6)(b) (3rd ed. 1999). "Fraud claims brought under the RICO Act are subject to the particularity requirements of Rule 9(b)." 5 Wright & Miller, Federal Practice and Procedure 2d § 1251.1 (1988) (emphasis added).

Furthermore, Rule 9(b) by its terms applies only to those cases in which fraud or mistake are averred. The particularity requirement is a means for courts to summarily dispose of frivolous lawsuits based on fraud. Courts applying the particularity requirement to all RICO allegations have reasoned that the purposes advanced by Rule 9(b) are equally served by applying the rule to non-fraud RICO claims. These courts have also concluded that RICO allegations are even more damaging to a defendant's reputation by labeling him with the stigma-laden term "racketeer." See Plount ("Yet all of the concerns that dictate that fraud be pleaded with particularity exist with even greater urgency in civil RICO actions."). But see Sedima v. Imrex Co., 473 U.S. 479, 492, 105 S.Ct. 3275, 3283, 87 L.Ed.2d 346 (1985)

("As for stigma, a civil RICO proceeding leaves no greater stain than do a number of other civil proceedings"); Rodonich v. House Wreckers Union Local 95, 627 F.Supp. 176, 178 (S.D.N.Y.1985) (questioning propriety of altering RICO's pleading burden). However, federal courts have a greater need to summarily treat frivolous RICO claims than fraud claims because the civil RICO treble damages clause provides a strong incentive for plaintiffs to convert the garden variety fraud cause of action into a racketeering action.

We have considered the reasoning of the above cases and we agree with the cases that do not require pleading to comply with Rule 9 unless fraud is alleged as the predicate act.⁷ There are many actions that could damage a person's reputation and particularity should not be required in each of these cases. This was simply not intended by the enactment of Rule 9. "Since the rule is a special pleading requirement and contrary to the general approach of simplified pleading adopted by the federal rules, its scope of application should be construed narrowly and not extended to other legal theories or defenses." 5 Wright and Miller Federal Practice and Procedure 2d § 1297 (1990). Accordingly, the circuit court's holding that the particularity requirement of Rule 9(b) applies in this case is error.⁸

B) "Predicate Acts"⁹

The circuit court also held that appellants did not plead the existence of two predicate acts that could constitute a pattern of racketeering. The circuit court held that the alleged violations of two sections of the South Carolina Video Game Machines Act cannot serve as predicate offenses under RICO.¹⁰ We disagree.

In their complaint, appellants allege respondents have violated §§ 12-21-2791 and 12-21-2804(A) and (B). Section 12-21-2791 provides for a $125 cap on the amount that may be paid out as winnings on a video game machine. This section does not provide any penalty. Violations of this specific section are punishable under § 12-54-40(H) which provides for a civil penalty and not any criminal penalty.¹¹ Thus, a violation of § 12-21-2791 cannot be a predicate offense for a RICO violation. The circuit court correctly ruled that § 12-21-2791 cannot be a predicate act and, in fact, appellants concede this in their reply brief.

Section 12-21-2804(B) provides: "No person who maintains a place or premises for the operation of machines licensed under Section 12-21-2720(A)(3)¹² may advertise in any manner for the playing of the machines nor may a person offer or allow to be offered any special inducement to a person for the playing of machines permitted under Section 12-21-2720(A)(3)." (emphasis added). Section 12-21-2804(F) provides in pertinent part: "A person violating subsections (A), (B), (D), or (E) of this section is subject to a fine of up to five thousand dollars to be imposed by the commission. The commission, upon a determination that the violation is wilful, may refer the violation to the...