Haroco, Inc. v. AMERICAN NAT. BANK AND TRUST CO.

• Decision Date: 07 July 1986
• Docket Number: No. 83 C 1618.,83 C 1618.
• Parties: HAROCO, INC., et al., Plaintiffs, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

647 F. Supp. 1026

HAROCO, INC., et al., Plaintiffs, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, et al., Defendants.

No. 83 C 1618.

United States District Court, N.D. Illinois, E.D.

July 7, 1986.

Joel M. Hellman, Aram A. Hartunian, Ronald L. Futterman, Robert C. Howard, Hartunian, Futterman & Howard, Chtd., Chicago, Ill., for plaintiffs.

Don H. Reuben, Robert W. Tarun, Reuben & Proctor, Katherine Rakowsky, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

DECKER, District Judge.

Haroco, Inc., Roman Ceramics, Inc., California Originals, Inc. and Mike Wayne Distilled Products Co., (collectively, "plaintiffs"), bring this class action against American National Bank and Trust Co. of Chicago ("ANB"), and its employee Ronald Grayheck ("Grayheck"). The original complaint, filed in March of 1983, included claims under the Racketeer Influenced Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, and pendent state claims. The defendants successfully moved for dismissal of the complaint. The court held plaintiffs had failed to state a RICO cause of action because the complaint did not allege a RICO injury distinct from that arising from the predicate offenses. Plaintiffs took a successful appeal to the Seventh Circuit; Haroco, Inc. v. American National Bank and Trust Co. of Chicago, 747 F.2d 384 (7th Cir.1984). The United States Supreme Court affirmed the Seventh Circuit's decision; American National Bank and Trust Co. of Chicago v. Haroco, Inc., 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). In so doing, the Court relied principally on its decision in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985).

On remand, plaintiffs have filed a Second, and now a Third Amended Complaint (hereafter, the "complaint"). Counts I, II, and III allege causes of action under RICO. Count IV includes breach of contract claims. Count V asserts violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 121½, ¶ 261 et seq. Finally, Count VI alleges breaches of fiduciary duty.

The defendants move to dismiss the complaint. ANB contends plaintiffs' RICO claims under Counts I, II, and III must be dismissed under Fed.R.Civ.P. 12(b)(6),¹ because the complaint does not plead the requisite pattern of racketeering. Grayheck makes the same argument with respect to Count I, the only count to which he is a defendant.² In the event the court dismisses the RICO counts, ANB argues for dismissal of the pendent counts for want of jurisdiction. Fed.R.Civ.P. 12(b)(1); United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Should ANB's motion fail with respect to any of the RICO counts, its Rule 12(b)(1) motion would fail as well. In that circumstance, ANB raises additional arguments for dismissal of Counts V and VI under Fed.R.Civ.P. 12(b)(6).

I. Factual Background

The following facts, which must be taken as true for purposes of this motion, appear from the complaint. ANB made certain loans to plaintiffs, the interest rates for which were provided in certain loan agreements and promissory notes executed by the parties. These interest rates were tied to ANB's prime rate, i.e. "one percent over the bank's prime rate." Complaint at ¶ 13. "Prime Rate" was expressly defined as "the rate of interest charged by ANB to its largest and most creditworthy commercial borrowers for 90-day unsecured commercial loans." Id. Of course, ANB's prime rate fluctuated over time. These changes were reflected in the interest rates on plaintiffs' loans. ANB, through Grayheck and other employees, defrauded plaintiffs by calculating these interest rates based upon a rate above its actual prime rate. In furtherance of this scheme, ANB used the mails to notify plaintiffs of changes in the interest rates and secure interest payments.

II. Discussion

A. RICO Claims

1. Counts I, II and III: The RICO Pattern Requirement

Counts I and III are brought under 18 U.S.C. § 1962(c) which provides in pertinent part:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity ...

To paraphrase, plaintiffs must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, 473 U.S. at ___, 105 S.Ct. at 3285.

Count I alleges Grayheck conducted ANB's affairs through a pattern of racketeering. Count III alleges ANB conducted the affairs of its parent, Walter E. Heller International Corp., through a pattern of racketeering.

Count II is premised upon 18 U.S.C. § 1962(a) which provides:

It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, 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 ...

The theory here is that ANB received and used proceeds from a pattern of racketeering.

Under all three counts, plaintiffs must plead a pattern of racketeering. The defendants contend plaintiffs have not done so.

In the aftermath of the Supreme Court's recent decision in Sedima, supra, judicial attempts to limit the reach of civil RICO to the infiltration of legitimate businesses by organized crime have focused on the pattern requirement of section 1962(c). In Sedima, the Supreme Court explains that RICO's application to so-called "respectable businesses," is primarily due to the breadth of its predicate offenses, particularly wire, mail and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of the pattern requirement. Sedima, 473 U.S. at ___, 105 S.Ct. at 3287. In its much discussed footnote 14, Sedima provides some guidance as to the appropriate interpretation of the pattern requirement:

The definition of a "pattern of racketeering activity" differs from the other provisions in § 1961 in that it states that a pattern "requires at least two acts of racketeering activity," § 1961(5) (emphasis added), not that it "means" two such acts. 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." ... 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 Sen. McClellan). See also id. at 35193 (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).

Sedima, 473 U.S. at ___ n. 14, 105 S.Ct. at 3285 n. 14 (emphasis in original).

In the year since Sedima, some members of this court have enthusiastically embraced what has been perceived as the Supreme Court's invitation to limit civil RICO through a restrictive interpretation of the pattern requirement. My colleague, Judge Shadur, has been at the forefront of this effort. See e.g. Northern Trust Bank/O'Hare, N.A. v. Inryco, Inc., 615 F.Supp. 828 (N.D.Ill.1985); United States v. Yonan, 622 F.Supp. 721 (N.D.Ill.1985); SJ Advanced Technology & Management Corp. v. Junkunc, 627 F.Supp. 572 (N.D. Ill.1986); Dunham v. Independence Bank of Chicago, 629 F.Supp. 983 (N.D.Ill.1986). Inryco represents Judge Shadur's most comprehensive statement on this subject. Inryco's analysis, however, is somewhat confusing. At the outset, it observes the evolution of two divergent views with respect to the pattern requirement. One view allows that any two racketeering acts by an enterprise, no matter how unrelated, constitute the requisite pattern. The other requires some relation among the acts. This latter view, according to Inryco, had been embraced by the Seventh Circuit in United States v. Starnes, 644 F.2d 673, 677-678 (7th Cir.1981), cert. denied, 454 U.S. 826, 102 S.Ct. 116, 70 L.Ed.2d 101 (1981), and United States v. Weatherspoon, 581 F.2d 595, 601-602 (7th Cir.1978). judge Shadur found the Seventh Circuit's view persuasive, and with this, the court is in full agreement.

At this point, however, Judge Shadur shifts ground, arguing that, in addition to similarity, pattern connotes a multiplicity of criminal events:

"Pattern" ... connotes a multiplicity of events: Surely the continuity inherent in the term presumes repeated criminal activity, not merely repeated acts to carry out the same criminal activity. It places a real strain on the language to speak of a single fraudulent effort,

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