Montesano v. Seafirst Commercial Corp.

• Decision Date: 05 June 1987
• Docket Number: No. 85-3755,85-3755
• Citation: 818 F.2d 423
• Parties: RICO Bus.Disp.Guide 6646 John MONTESANO, et al., Plaintiffs-Appellants, v. SEAFIRST COMMERCIAL CORP., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 423

818 F.2d 423

RICO Bus.Disp.Guide 6646

John MONTESANO, et al., Plaintiffs-Appellants, v. SEAFIRST COMMERCIAL CORP., et al., Defendants-Appellees.

No. 85-3755.

United States Court of Appeals Fifth Circuit.

June 5, 1987.

Galen S. Brown, Mack E. Barham, New Orleans, La., for plaintiffs-appellants.

Richard A. Goins, George V. Baus, Joseph Lemire, New Orleans, La., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before POLITZ, JOLLY and HIGGINBOTHAM, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

We are asked to define "pattern of racketeering activity" and to determine if plaintiffs properly alleged an "association in fact" enterprise in this appeal from a dismissal of a complaint for money damages under civil RICO. We conclude that plaintiffs have alleged a pattern of racketeering activity as defined by R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (5th Cir.1985), but that plaintiffs failed to allege an entity separate and apart from the alleged pattern of racketeering activity, and we AFFIRM. In doing so, we follow R.A.G.S. but urge that it be overturned, en banc.

I

In this appeal from a Rule 12(b)(6) dismissal, we accept the facts as alleged in the complaint. According to the complaint, Seafirst Commercial Corp. loaned money to John Montesano, Joseph Maturin and Roland Maturin, secured by ship mortgages on vessels owned by J.J. & R., a partnership among these three persons. In May of 1985, Strike-N-Arc Marine was repairing the M/V Riverlands, one of the mortgaged vessels. The partnership was delinquent in its payments to Seafirst. Seafirst did not foreclose but obtained possession of the vessel directly from Strike-N-Arc Marine.

The vessel owners allege that Seafirst and others accomplished this "repossession" by "falsely representing to employees of Strike-N-Arc that the property of plaintiffs was being legally removed by defendants." The complaint alleged a "pattern of racketeering," asserting wire fraud accomplished by telephone conversations by representatives of defendants in Texas and representatives of Kenner Marine and Machinery, Inc., the repossessing agent, in Louisiana, which were "in furtherance of a scheme or artifice" to "illegally gain possession of property," and mail fraud which occurred when defendants corresponded with each other "concerning the illegal means of acquiring plaintiffs' property."

The district court granted the motion to dismiss for failure to state a claim. The parties present several arguments regarding the application of civil RICO. We first treat the question whether plaintiffs have alleged a pattern of racketeering activity, and then turn to whether plaintiffs' allegations establish an "association in fact" enterprise for RICO purposes.

II

Of course, a violation of Sec. 1962(c) "requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) (footnote omitted). Before Sedima, we had not attempted to define fully the meaning of pattern. See, e.g., Owl Const. Co., v. Ronald Adams Contractor, 727 F.2d 540 (5th Cir.1984). An imaginative plaintiff could take virtually any illegal occurrence and point to acts preparatory to the occurrence, usually the use of the telephone or mails, as meeting the requirement of pattern. It was thought that the Supreme Court might brake the proliferation of private suits under RICO, but the Sedima Court declined the invitation to read narrowly the broadly phrased language of RICO. The Court, however, did observe:

As many commentators have pointed out, the definition of a "pattern of racketeering activity" differs from the other provisions in Sec. 1961 in that it states that a pattern "requires at least two acts of racketeering activity," Sec. 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." 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 "[t]he 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. Sec. 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, 105 S.Ct. at 3285 n. 14. We have not expressly reexamined our earlier treatment of pattern in the light of Sedima, at least with regard to whether a single discrete offense can be sliced into a pattern. Cf., Cowan v. Corley, 814 F.2d 223, 226-27 (5th Cir.1987) (concluding two acts do not constitute a pattern of racketeering activity in every instance). But we have noted that, as Judge Brown put it, "The Supreme Court appeared to challenge the lower courts to develop a more rigorous interpretation of pattern." Smoky Greenhaw Cotton Co., v. Merrill Lynch Pierce Fenner & Smith, 785 F.2d 1274, 1280-81, n. 7 (5th Cir.1986).

Plaintiffs argue here that we have implicitly adhered to our earlier definition of pattern since Sedima, pointing to Corwin v. Marney, Orton Investments, 788 F.2d 1063 (5th Cir.1986); Armco Industrial Credit Corp. v. S.L.T. Warehouse Co., 782 F.2d 475 (5th Cir.1986); and R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (5th Cir.1985).

In Corwin, we reversed the dismissal of RICO claims because the Supreme Court in Sedima had rejected the basis of the district court's ruling that RICO requires a distinct racketeering injury separate from the harm of predicate acts. 788 F.2d at 1069. While the Corwin panel concluded that the allegations were sufficient for certain predicate acts, the argument was not made, and the panel did not face the question of whether acts preparatory to a single event can constitute a pattern.

In Armco, we rejected an argument that there must be proof of a prior criminal conviction of the predicate acts or a discrete racketeering enterprise injury. 782 F.2d at 480-81. The panel expressly noted that "whether the predicate acts fell into a pattern was not before them" and observed that "we leave for the future the task of interpreting that phrase" Armco, 782 F.2d at 481 (citing R.A.G.S. Couture, Inc. v. Hyatt). But plaintiffs' argument regarding R.A.G.S. has more force.

In R.A.G.S., the plaintiff-corporation sued its former president and stockholder asserting that they had defrauded it. The corporation pointed to two mailings of false invoices as two acts of mail fraud; the two acts required for a pattern. The district court granted defendant's motion for summary judgment, concluding that there was evidence of only one act of mail fraud; it was persuaded that the asserted second mailing "was not caused by the defendants and was, therefore, not an execution of a scheme to defraud." Defendants argued on appeal that even if the two acts were caused by the defendants, they were not a pattern, pointing to Sedima's language that "while two acts are necessary, they may not be sufficient." 105 S.Ct. at 3285, n. 14. The panel in R.A.G.S. replied: "[T]he Supreme Court in Sedima implied that two 'isolated' acts would not constitute a pattern." 774 F.2d at 1355. "In this case, however, the alleged acts of mail fraud are related." Id. The panel then found that whether defendants caused the second mailing presented an issue of fact and reversed the grant of summary judgment. R.A.G.S., 774 F.2d at 1355.

Arguably R.A.G.S. did not address the issue before this panel, but rejected only the suggestion that two related acts of mail fraud could not constitute a pattern, 774 F.2d at 1355, at least in traditional terms of stare decisis. But our rule that one panel cannot overturn another serves a somewhat different purpose of institutional orderliness, a distinction evidenced by our insistence that, in the absence of intervening Supreme Court precedent, one panel cannot overturn another panel, regardless of how wrong the earlier panel decision may seem to be. Equally significant, drawing too fine a distinction here would invite further confusion in an already troubled subject. We then bow to R.A.G.S. but urge that it be overturned en banc.

III

To the extent R.A.G.S. decided the issue, we are now persuaded that the court should change course in order faithfully to serve congressional purpose. And our task is just that. As the Sedima Court observed, the Senate Report focused on the meaning of 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...