Menasco, Inc. v. Wasserman

• Decision Date: 28 September 1989
• Docket Number: No. 88-3073,88-3073
• Citation: 886 F.2d 681
• Parties: RICO Bus.Disp.Guide 7321 MENASCO, INC.; Lucky Two, Inc., Plaintiffs-Appellants, v. Barry M. WASSERMAN; Sounion Petroleum; Spheric Petroleum, a Texas Corporation; Alaina, Ltd., a Maryland Corporation; Ankar, Ltd., a Maryland Corporation; Lande Realty, Ltd., a Maryland Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 681

886 F.2d 681

RICO Bus.Disp.Guide 7321

MENASCO, INC.; Lucky Two, Inc., Plaintiffs-Appellants, v. Barry M. WASSERMAN; Sounion Petroleum; Spheric Petroleum a Texas Corporation; Alaina, Ltd., a Maryland Corporation Ankar, Ltd., a Maryland Corporation; Lande Realty, Ltd., a Maryland Corporation, Defendants-Appellees.

No. 88-3073.

United States Court of Appeals Fourth Circuit.

Argued Oct. 4, 1988.

Decided Sept. 28, 1989.

Andrew L. Hartman (Arvin E. Rosen, Siskind, Burch, Grady & Rosen, on brief) for plaintiffs-appellants.

Harry Levy (Joshua R. Treem, Schulman, Treem, Kaminkow & Gilden, P.A., on brief) for defendants-appellees.

Before HALL, PHILLIPS, and WILKINSON, Circuit Judges.

WILKINSON, Circuit Judge:

In this case we once again address the requirement that plaintiffs prove a "pattern" of racketeering activity under the RICO statute. Plaintiffs have sued defendants for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1961, et seq., and on state common law grounds of deceit, negligent misrepresentation, and breach of contract, arising out of the purchase of Texas oil development investments. The district court dismissed plaintiffs' action pursuant to Fed.R.Civ.P. 12(b)(6) because it failed to allege a pattern of racketeering activity. The district court also denied plaintiffs leave to amend their complaint. Fed.R.Civ.P. 15. We hold that although the complaint presently fails to allege a pattern of racketeering activity under RICO, the plaintiffs should be allowed to amend their complaint in light of the Supreme Court's recent analysis of RICO's pattern requirement in H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989).

I.

Because the complaint was dismissed pursuant to Fed.R.Civ.P. 12(b)(6), we assume the facts alleged in the complaint are true.

In September of 1984, defendant Barry M. Wasserman met with Benjamin I. Hendin and Frank S. Setren, two physicians, to discuss opportunities in the oil business. Wasserman is an attorney and principal of Sounion Petroleum, Inc., a Maryland corporation engaged in investing in oil and gas prospects. At the meeting, Wasserman explained that investors would share both development costs and net revenues, and obtained permission to form plaintiff companies, Menasco, Inc. and Lucky Two, Inc., which Drs. Hendin and Setren would serve as presidents and directors.

In October of 1984, Wasserman informed Drs. Hendin and Setren that their partner in Texas was Cascade Oil, Inc., and its principal Robert L. Leon. In November of 1984, Leon, with Wasserman's consent, offered the plaintiffs additional acreage in a White Flat field in Nolan County, Texas. Plaintiffs allege that Wasserman and Sounion misrepresented to them that as partners in the venture, they would all pay the same price for each percentage point purchased in oil and gas properties while, in fact, Sounion inflated the price it charged plaintiffs to approximately two to five times the price it paid. Plaintiffs also allege that Wasserman engaged in other improprieties and misrepresentations with respect to their purchase of investment shares.

In addition, plaintiffs allege that Wasserman: (1) solicited from them assignments of Rights of Action which he used to benefit Sounion, and not the plaintiffs; (2) conspired with the lessor of a well to terminate a lease on the well, and renegotiated the lease to the detriment of plaintiffs and to the benefit of Sounion; and (3) transferred from Sounion to Spheric Petroleum, Inc. and then to Alaina, Ltd., Ankar, Ltd., and Lande Realty, Ltd., a substantial interest in the oil wells in which Sounion was involved so as to shelter his funds and render himself judgment proof. As a direct consequence of Wasserman's conduct plaintiffs allege they have suffered a loss of $177,347.79.

On October 1, 1987, plaintiffs filed suit in the United States District Court for the District of Maryland alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961, et seq., and state law claims of deceit, negligent misrepresentation and breach of contract. They named as defendants Wasserman, Sounion Petroleum, Inc., Spheric Petroleum, Inc., Alaina, Ltd., Ankar, Ltd., and Lande Realty, Ltd. Each defendant moved to dismiss the RICO count for failure to state a claim upon which relief can be granted, and failure to plead the RICO count with requisite specificity.

Finding that plaintiffs "have presented no facts whatsoever" connecting defendants Spheric, Alaina, Ankar, and Lande Realty to the alleged RICO violation, the district court dismissed the claim as to those defendants. The court further held that in regard to the claim against Wasserman and Sounion the complaint failed to allege a "pattern of racketeering activity," an essential element in any RICO action. 18 U.S.C. Secs. 1961(5) & 1962(c). Inasmuch as the RICO claim was the sole basis for federal jurisdiction, the remaining state law counts were dismissed without prejudice to the right to pursue those claims in state court.

Subsequent to the dismissal, plaintiffs moved the district court to reconsider its order and to grant leave to amend their complaint. The court denied these motions, and this appeal followed.

II.

Plaintiffs first claim that the district court erred in finding that they failed to allege a pattern of racketeering activity. We hold, however, that no pattern of activity was alleged.

The "pattern" requirement is more than incidental to the operation of the RICO statute. In providing a remedy of treble damages for injury "by reason of a violation of" RICO's substantive provisions, 18 U.S.C. Sec. 1964(c), Congress contemplated that only a party engaging in widespread fraud would be subject to such serious consequences. See S.Rep. No. 617, 91st Cong., 1st Sess. 158 (1969) U.S.Code Cong. & Admin.News ("One isolated 'racketeering activity' was thought insufficient to trigger the remedies provided under the proposed chapter, largely because the net would be too large and the remedies disproportionate to the gravity of the offense."); 116 Cong.Rec. 35193 (1970) (RICO "not aimed at isolated offender") (statement of Rep. Poff). The pattern requirement in Sec. 1961(5) thus acts to ensure that RICO's extraordinary remedy does not threaten the ordinary run of commercial transactions; that treble damage suits are not brought against isolated offenders for their harassment and settlement value; and that the multiple state and federal laws bearing on transactions such as this one are not eclipsed or preempted.

The Supreme Court recently visited RICO's pattern requirement. H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). The H.J. Inc. Court reaffirmed that "to prove a pattern of racketeering activity a plaintiff ... must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." Id. 109 S.Ct. at 2900 (emphasis in original). Predicate acts are related if they 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.' " Id. at 2901, quoting 18 U.S.C. Sec. 3575(e).

Continuity, in turn, refers "either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." Id. at 2902 (emphasis added). To satisfy the continuity element, a plaintiff must show that "the predicates themselves amount to, or ... otherwise constitute a threat of, continuing racketeering activity." Id. at 2901 (emphasis in original). Significantly, "[p]redicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct." Id. at 2902. See also id. (continuity requires activity over a "substantial period of time"); id. at n. 4 (continuity requires "long-term criminal activity"). Thus, predicate acts must be part of a prolonged criminal endeavor.

In articulating the "continuity plus relationship" test, the H.J. Inc. Court endorsed a commonsensical, fact-specific approach to the pattern requirement. Id. at 2899, 2902. Accordingly, the H.J. Inc. Court rejected, as had this court and most other circuits, the rigid notion that predicate acts form a pattern only when they are part of separate illegal schemes. 109 S.Ct. at 2899-2901 & n. 3. See also International Data Bank, Ltd. v. Zepkin, 812 F.2d 149, 155 (4th Cir.1987). The Court observed that "multiple predicates within a single scheme" may indeed constitute criminal activities which have long-term and widespread consequences--the very acts RICO was intended to prohibit. 109 S.Ct. at 2899. Predicate acts which arise under a single scheme, then, may be a pattern for RICO purposes if they are continuous and related. Again, however, the test is commonsensical, not formulaic. Id. Thus, the existence of a single scheme alone, while not dispositive, can be relevant to the continuity inquiry. See id. at 2901 ("proof that a RICO defendant has been involved in multiple criminal schemes would certainly be highly relevant to the inquiry into the continuity of the defendant's racketeering activity").

Here, plaintiffs' allegations fail to satisfy the continuity prong of RICO's pattern requirement. Defendants' actions were narrowly directed towards a single fraudulent goal. They involved a limited purpose: to defraud Menasco, Inc. and Lucky Two, Inc. with respect to their oil interests. They involved but one perpetrator: Wasserman. They involved but one set of victims: Menasco and Lucky Two. Finally, the transaction took place over approximately one year. Clearly, these acts do not constitute "ongoing unlawful activities whose scope and persistence pose a special...