Johnson v. Schopf

Decision Date15 September 1987
Docket NumberCiv. No. 4-86-870.
Citation669 F. Supp. 291
PartiesDavid A. JOHNSON, individually and as partner in United Investment Group, a Minnesota Partnership, Melvin Roth and Thomas E. Brever, Trustee for Equivest International, Inc., a Minnesota corporation, Plaintiffs, v. James H. SCHOPF, Paul DeZiel, Robert Reuss, Earl Boven, Douglass Sause, Kenneth Williams, Alvin S. Malmon, and Smith, Juster, Feikema, Malmon & Haskvitz, Defendants.
CourtU.S. District Court — District of Minnesota

Stephen P. Kelly, and Mackall, Crounse & Moore, Minneapolis, Minn., for plaintiffs.

Phillip A. Cole, and Lommen, Nelson, Cole & Stageberg, Minneapolis, Minn., for defendants Malmon and Smith, Juster, Feikema, Malmon & Haskvitz.

George R. Serdar, and Bowman and London, Ltd., St. Paul, Minn., for defendants Reuss and Sause;

Lauren Lonergan, and Hart, Bruner, O'Brien & Thornton, Minneapolis, Minn., for defendant Earl H. Boven.

MEMORANDUM AND OPINION

DOTY, District Judge.

The claims in this case arise out of each parties' involvement with Equivest International, Inc. ("Equivest"), a now bankrupt corporation. Shareholder plaintiffs David Johnson and Melvin Roth have asserted claims against former officers and directors of Equivest for violations of federal and state securities law, violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO") 18 U.S.C. § 1961 et seq., common law fraud, and misrepresentation. Johnson and Roth have also raised a claim against attorney Alvin S. Malmon and the law firm of Smith, Juster, Feikema, Malmon & Haskvitz ("Smith, Juster") for aiding and abetting the alleged securities violations. Equivest's Trustee in Bankruptcy has also raised, on behalf of the corporation, a negligence claim against Malmon and Smith, Juster.

Former Equivest directors Earl Boven, Robert Reuss and Douglass Sause now move to dismiss plaintiffs' RICO claims for failure to state a claim upon which relief can be granted or, in the alternative, for summary judgment to dismiss the RICO counts.1 Fed.R.Civ.P. 12(b)(6), 56. Defendants Malmon and Smith, Juster move to dismiss the Trustee's negligence claim for lack of subject matter jurisdiction.

FACTS

Equivest was incorporated on February 24, 1984. Later in that same year, Equivest intended to raise capital by distributing a Private Placement Offering Circular to potential investors in Equivest common stock. At the company's direction, defendant Malmon and his associate Mark Haggerty, drafted and filed the offering circular. The circular listed Smith, Juster as counsel to the company and stated that Smith, Juster had "rendered an opinion on the legality of the corporate status of the company." Attorneys Malmon and Haggerty assert that they prepared the information in the circular based upon representations made to them by Equivest's officers and directors.

The offering circular was subsequently distributed to prospective investors in Equivest common stock. Plaintiff shareholders Johnson and Roth were among those who received the circular. Plaintiffs allege that the offering circular contained false and misleading information and failed to state material facts including, but not limited to, the following:

(a) A statement that Equivest owned 245,000 shares of stock in ATR Electronics, Inc. when in fact that stock was owned by defendants Schopf, Boven and Sause and "contributed" by them to Equivest as payment for their capital stock subscriptions;
(b) Non-disclosure of the fact that Equivest had assumed a demand promissory note for $78,000 transferred to it by defendant Boven and secured by the ATR stock;
(c) Non-disclosure of the fact that defendants Schopf, Boven and Sause had extensive investments in ATR as well as close association with ATR's management;
(d) A statement that Equivest wholly owned the Cardinal Corporation when it in fact did not;
(e) Non-disclosure of agreements to pay third parties more than $300,000.

Plaintiffs' Complaint, par. 21.

Plaintiffs Johnson and Roth contend that they purchased the Equivest common stock in reliance on the information contained in the offering circular, and that but for such reliance, neither Johnson nor Roth would have purchased the stock. In addition to claiming fraud, misrepresentation and violations of securities law, Johnson and Roth allege that the conduct of former Equivest directors Schopf, DeZiel, Boven, Reuss and Sause amounts to racketeering in violation of 18 U.S.C. § 1961 et seq. Specifically, plaintiffs claim violations of § 1962(a) (Prohibiting the use or investment of income derived from a pattern of racketeering activity in a RICO enterprise), § 1962(c) (prohibiting a person from conducting the affairs of a RICO enterprise through a pattern of racketeering activity) and § 1962(d) (making unlawful a conspiracy to violate any of the other RICO sections). Defendants Boven, Reuss and Sause now move to dismiss plaintiffs' RICO claims, asserting that plaintiffs have shown neither the existence of a RICO "enterprise" nor of a "pattern" of racketeering activity as required by 18 U.S.C. § 1961.

Equivest's Trustee in Bankruptcy claims that Malmon and Smith, Juster negligently failed to obtain or convey information to the corporation regarding the allegedly false and misleading representations contained in the offering circular. Defendants Malmon and Smith, Juster move to dismiss the claim without prejudice for lack of subject matter jurisdiction.

The Court will first address plaintiffs' RICO allegations then turn to the question whether the Court has subject matter jurisdiction over the Trustee's negligence claim.

DISCUSSION
I. The RICO Allegations

In order to establish a RICO cause of action, plaintiffs must prove that defendants conducted an "enterprise" through a "pattern" of racketeering activity. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). Defendants move to dismiss plaintiffs' RICO claims on the grounds that plaintiffs have failed to show either a "pattern" of racketeering activity or the existence of a RICO "enterprise."

A. Pattern of Racketeering Activity

An essential element of the civil RICO cause of action is proof that defendants have engaged in a "pattern of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. at 496, 105 S.Ct. at 3285; Holmberg v. Morrisette, 800 F.2d 205, 209 (8th Cir.1986); Superior Oil Co. v. Fulmer, 785 F.2d 252, 255 (8th Cir.1986). The "pattern" requirement of § 1961(5) has eluded precise definition. The section itself provides little guidance, offering merely that "a pattern of racketeering activity requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5). The Supreme Court interpreted § 1961(5) to imply that "while two acts (of racketeering activity) are necessary, they may not be sufficient. Indeed, in common parlance, two of anything do not generally form a "pattern"." Sedima, 473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14. The Court further noted that the legislative history also supports the view that two isolated acts of racketeering activity do not constitute a "pattern": "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." 473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14 (quoting S.Rep. No. 91-617, p. 158 (1969)) (emphasis added).

The United States Court of Appeals for the Eighth Circuit has embraced the "continuity plus relationship" analysis of the pattern requirement. See Holmberg v. Morrisette, 800 F.2d 205; Superior Oil Co. v. Fulmer, 785 F.2d 252. In order to establish a pattern of racketeering activity plaintiffs must allege and prove (1) relationship, and (2) continuity. "Relationship" is established by proof of several related acts in furtherance of a single criminal scheme. See Superior Oil, 785 F.2d at 257; H.J. Inc. v. Northwestern Bell Telephone Co., 653 F.Supp. 908, 911 (D.Minn. 1987) appeal docketed, 829 F.2d 648 (8th Cir.1987). "Continuity" is demonstrated by proof that defendants have committed the same or similar racketeering activities in the past or are engaged in other criminal activities elsewhere. Holmberg, 800 F.2d at 210-211; Superior Oil, 785 F.2d at 257; H.J. Inc. v. Northwestern Bell Telephone Co., 653 F.Supp. at 911.

In Superior Oil, the Court held that several related acts of mail and wire fraud as part of a single scheme to divert natural gas from plaintiff's pipeline satisfied the "relationship" prong of the pattern requirement. The Court concluded, however, that defendant's conduct did not amount to a pattern of racketeering activity because the "continuity" prong had not been satisfied—plaintiff failed to present any evidence suggesting that such activities had occurred previously or that the individuals involved were engaged in other criminal activities. Superior Oil, 785 F.2d at 257. In Holmberg, the plaintiff's RICO claim was also dismissed for failure to prove the "continuity" necessary to form a "pattern" of racketeering activity. Holmberg, 800 F.2d at 210.

Notwithstanding the multiple instances of fraudulent conduct present in both Superior Oil and Holmberg, the Court refused to find a pattern of racketeering activity because all of defendants' actions were committed in furtherance of a single fraudulent scheme. In both cases, the Court observed that "it places a real strain on the language to speak of a single fraudulent effort, implemented by several fraudulent acts, as a "pattern of racketeering activity"." Holmberg, 800 F.2d at 210; Superior Oil, 785 F.2d at 257 (quoting Northern Trust Bank/O'Hare, N.A. v. Inryco, Inc., 615 F.Supp. 828, 831 (N.D.Ill. 1985).

Superior Oil and Holmberg make clear that in order to establish a pattern of racketeering activity, RICO plaintiffs must prove...

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