Nagle v. Merrill Lynch, Pierce, Fenner & Smith

• Decision Date: 18 March 1992
• Docket Number: Civ. No. 3-91-CV-10003.
• Citation: 790 F. Supp. 203
• Parties: Daniel L. NAGLE, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER, & SMITH, INC.; et al., Defendants.
• Court: U.S. District Court — Southern District of Iowa

790 F. Supp. 203

Daniel L. NAGLE, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER, & SMITH, INC.; et al., Defendants.

Civ. No. 3-91-CV-10003.

United States District Court, S.D. Iowa, Davenport Division.

March 18, 1992.

COPYRIGHT MATERIAL OMITTED

James E. Beckley, Wheaton, Ill., Edward N. Wehr, Davenport, Iowa, for plaintiff Daniel L. Nagle.

William C. Davidson, Marsha Weg Bormann, Davenport, Iowa, for defendant Merrill Lynch.

Michael Noyes, Davenport, Iowa, for defendant Laurie Jones Canady.

RULING AND ORDER

LONGSTAFF, District Judge.

Defendants move for partial summary judgment on or, in the alternative, to dismiss, Count VII (RICO) of plaintiff's amended complaint (revised). Defendants argue (1) that plaintiff cannot establish the existence of an enterprise separate and distinct from the persons alleged to have associated with the enterprise, (2) that plaintiff failed to allege injury "by reason of" investment of racketeering income, and (3) that plaintiff failed to state with particularity his allegations of fraud. The motion for summary judgment is premised on the first argument, with the latter two arguments urged as grounds supporting the alternative motion to dismiss. Plaintiff resists the motion, and the matter was heard February 21, 1992. Appearances are noted in the clerk's court minutes.

I. SUMMARY JUDGMENT

"Person" Separate and Distinct from "Enterprise"

Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Fed. R.Civ.Proc. 56(c). An issue of material fact is genuine if it has a real basis in the record. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). A genuine issue of fact is material if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

Procedurally, the movant has the initial responsibility of informing the district court of the basis for its motion and identifying those portions of the record which show a lack of a genuine issue. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). The movant is not required by the rules to support its motion with affidavits or other similar materials negating the opponent's claim. Id.

"When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356. "Where the record as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'" Id. at 587, 106 S.Ct. at 1356. "The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. at 2552.

In ruling on a motion for summary judgment, the court must bear in mind the actual quantum and quality of proof necessary to support liability under the applicable law. Anderson, 477 U.S. at 254, 106 S.Ct. at 2513. The court must assess the adequacy of the nonmovants' response and whether that showing, on admissible evidence, would be sufficient to carry the burden of proof at trial. See Celotex, 477 U.S. at 322, 106 S.Ct. at 2552; S. Childress, A New Era for Summary Judgments: Recent Shifts at the Supreme Court, 116 F.R.D. 183, 188 (1987). As stated in Celotex, summary judgment procedure "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to secure the just, speedy and inexpensive determination of every action." Id. at 327, 106 S.Ct. at 2555.

FACTS

The following facts are either undisputed or represent the plaintiff's version where his showing, on admissible evidence, would be sufficient to carry the burden of proof at trial.

1. Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter "Merrill Lynch") is a Delaware Corporation with its principal place of business at One Liberty Plaza, 165 Broadway, New York, New York.

2. Defendant Laurie Jones Canady (hereinafter "Canady") is a resident of Johnson County, Iowa.

3. Merrill Lynch has conducted business in Scott County, Iowa at all times material; and Canady at pertinent times was an employee and agent of Merrill Lynch.

4. Merrill Lynch is a Securities Commission Broker subject to control by the Securities Exchange Act, 15 U.S.C. § 78a et seq.

5. Plaintiff Daniel L. Nagle (hereinafter "plaintiff") filed this action on December 21, 1990, in the Iowa District Court for Scott County, seeking to recover for allegedly improper and unauthorized investment and trading of his securities account. Plaintiff's original complaint alleged violations of the Securities Exchange Act of 1934 as well as common law fraud, breach of fiduciary duty, and conversion.

6. Defendants removed this action to federal court on January 23, 1991.

7. On April 30, 1991, plaintiff moved to amend his complaint to add allegations of negligent supervision and violations of the Racketeer Influenced and Corrupt Organizations Act (hereinafter "RICO"). On June 7, 1991, the court permitted the amendment, as revised. In a later order, the court indicated that it "allowed the amendment even though it was concerned that plaintiff had not asserted a sufficient basis to proceed on that claim." The court stayed discovery on the RICO claim pending response to defendants' RICO interrogatories and the filing of defendants' motion for summary judgment. (Plaintiff's responses to defendants' interrogatories were filed as exhibits at the hearing.)

8. Plaintiff alleges in his complaint that "Defendants are both `Persons' as defined by 18 U.S.C. Section 1961(3)" and that "Defendants constitute an `Enterprise' within the meaning of 18 U.S.C. Section 1961(4)."

9. Merrill Lynch conducted business in Scott County, Iowa, through its Davenport branch office. The Davenport branch office is under the supervision of national and regional managers. The Resident Vice President of the Davenport office, Stephen E. Lyders, reports to a district manager. The district manager reports to a divisional manager who reports to the New York office. Personnel from the New York office perform annual compliance and operation audits. The brokers' salaries are calculated in and paid from the New York office. The office manager is not paid directly for the sale of a product, and the price paid by a customer is set by the New York office or by prospectus. The New York Compliance Department sets all compliance policies and procedures. The District or National Sales Organizations set all goals and objectives.

10. The Davenport branch office maintains a separate registration with the National Association of Securities Dealers (NASD) in compliance with section 27 of the NASD Rules for offices with more than five brokers.

DISCUSSION

Under the Racketeer Influenced and Corrupt Organizations Act (RICO), 84 Stat. 922, codified as amended at 18 U.S.C. §§ 1961-68 (1988), it is unlawful for "any person employed by or associated with any enterprise ... to conduct or participate ... in the conduct of such enterprise's affairs through a pattern of racketeering activity...." 18 U.S.C. § 1962(c). An "enterprise" includes "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity...." 18 U.S.C. § 1961(4).

A person named as a defendant cannot also be the entity identified as the enterprise. Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 995 (8th Cir. 1989); Bennett v. Berg, 685 F.2d 1053, 1061-62 (8th Cir.1982), modified on reh'g, 710 F.2d 1361 (8th Cir.) (en banc), cert denied, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983). Accordingly, plaintiff cannot bring a § 1962(c) claim against Merrill Lynch in which Merrill Lynch also is alleged to be the enterprise. See Bowman v. Western Auto Supply Co., 773 F.Supp. 174, 177 (W.D.Mo.1991); Oceanic Cablevision, Inc. v. M.D. Elec., 771 F.Supp. 1019, 1023-24 (D.Neb.1991); Hanline v. Sinclair Global Brokerage Corp., 652 F.Supp. 1457, 1461-62 (W.D.Mo.), appeal dismissed, 815 F.2d 713 (8th Cir.1987); Minnesota Odd Fellows Home Found. v. Engler & Budd Co., 630 F.Supp. 797, 800 (D.Minn.1986). Plaintiff has failed to allege a separate enterprise in his complaint.

In response to defendants' interrogatories and motion for summary judgment, plaintiff has identified the Davenport branch office of Merrill Lynch as the enterprise. The mere fact that the Davenport branch office is required by NASD rules to be registered separately does not raise a genuine issue of material fact with regard to whether it is separate from Merrill Lynch and therefore a separate RICO enterprise. Carving out a piece of the corporate defendant to artificially create a distinct enterprise is not permissible. See e.g., Brittingham v. Mobil Corp., 943 F.2d 297, 300-03 (3d Cir.1991) (plaintiff could not name Mobil as the defendant and its subsidiary, Mobil Chemical, as the enterprise); United States v. Computer Sciences Corp., 689 F.2d 1181, 1190 (4th Cir. 1982), cert. denied, 459 U.S. 1105, 103 S.Ct. 729, 74 L.Ed.2d 953 (1983) (unincorporated division of defendant corporation was not a separate RICO enterprise); Gilbert v. Prudential-Bache Sec., Inc., 643 F.Supp. 107, 109 (E.D.Pa.1986) (various branch offices of corporate defendant cannot be regarded as separate entities for purposes of RICO); Rush v. Oppenheimer & Co., 628 F.Supp. 1188, 1194 (S.D.N.Y.1985) (corporate defendants central office indistinguishable in structure...