Olive Can Co., Inc. v. Martin
| Decision Date | 13 July 1990 |
| Docket Number | No. 89-3319,89-3319 |
| Citation | 906 F.2d 1147 |
| Parties | , RICO Bus.Disp.Guide 7513 OLIVE CAN CO., INC., et al., Plaintiffs-Appellants, v. Jacob MARTIN, Jonathan Martin, and D.C.S. Corporation, f/k/a Delicious Cookie Sales Company, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Barry Sullivan, Larry M. Wolfson, Jenner & Block, Chicago, Ill., Michael Palmer, Middlebury, Vt., for plaintiffs-appellants.
James P. Chapman, Alan S. Mills, Chapman & Associates, Chicago, Ill., for defendants-appellees.
Before WOOD, Jr., and FLAUM, Circuit Judges, and CRABB, Chief District Judge. *
Six creditors of Delicious Cookie Company ("Delicious Cookie" or the "Company") brought this action to recover approximately $354,000 for goods sold to the Company. The plaintiffs alleged that defendants Jacob Martin and Jonathan Martin, owners and officers of Delicious Cookie, violated RICO, 18 U.S.C. Sec. 1961 et seq., when they set up a sham corporation whose existence they concealed from the plaintiffs, in order to divert to Jacob Martin substantial sums of money that otherwise would have been available to satisfy the Company's obligations to the plaintiffs. The district court granted summary judgment to the defendants on their RICO claim, finding that the undisputed facts established that the defendants had not engaged in a pattern of racketeering activity and dismissed the remaining pendent claims. We affirm.
In the early 1980's, Delicious Cookie manufactured and sold cookies which were designed to be given as gifts during the Christmas season. It was wholly owned by Jonathan Martin, given to him by his father Jacob. Jacob and Jonathan were the sole directors and officers of the company.
In early-1983 Delicious Cookie found itself in severe financial distress. In April, Aetna Bank, one of its creditors, demanded that Delicious Cookie repay a working capital loan of approximately $170,000. Delicious Cookie was unable to repay this obligation. The Company also had an outstanding loan of $365,000 from Jacob Martin. These obligations were all the more burdensome since the Company needed additional capital to produce cookies for the upcoming holiday season; with Aetna Bank holding a priority interest in all of Delicious Cookie's assets, financing was difficult to obtain.
To provide the necessary infusion of capital, Jacob Martin agreed to lend additional funds to Delicious Cookie if the company would provide him with a security interest. Recognizing the need to circumvent Aetna Bank's priority interest in Delicious Cookie's assets, Jacob Martin created Delicious Cookie Sales Corporation ("DCS"), purportedly to serve as Delicious Cookie's "selling arm." According to the written agreement between Jacob Martin and Delicious Cookie concerning the formation of the new entity, DCS was to purchase Delicious Cookie's inventory with funds advanced by Jacob Martin and secured by DCS's assets. DCS would sell the product to customers and pay Jacob Martin out of the revenue derived from these sales. Between August and October 1983, Jacob Martin transferred approximately $550,000 to DCS pursuant to the agreement. DCS had no employees, no payroll, no stationery, and no profit margin. Jacob Martin was the sole shareholder and only director of DCS.
After the Martins created and funded DCS, they prepared Delicious Cookie for its baking season by purchasing merchandise on credit from the plaintiffs, who were suppliers of materials used for cookie production. The plaintiffs were not told by Delicious Cookie or the Martins of DCS or Jacob Martin's secured interest in DCS. Unaware of these important facts, the plaintiffs collectively sold to Delicious Cookie $307,996 worth of cookie ingredients. With these ingredients in hand, Delicious Cookie produced cookies during the Fall of 1983 and Spring of 1984.
Delicious Cookie's continued poor financial health, however, led Jonathan Martin to request extended payment terms from each of the plaintiffs during the summer and fall of 1983. He explained to the plaintiffs that Delicious Cookie suffered cash flow difficulties because its customers were primarily fundraisers who did not pay for the cookies until they received payment from their customers. He promised to pay the plaintiffs as soon as Delicious Cookie received revenues from the fundraisers. The plaintiffs were still not informed of the arrangement with DCS. Eventually, the plaintiffs were told of Jacob Martin's loan to DCS, but they were not informed that Jacob Martin would receive priority in payment or that Jacob Martin had received repayments from DCS on his loan.
Although Delicious Cookie sold over two million dollars worth of cookies during the 1983-84 season, the Company was unable to repay all of its obligations. These defaults spurred three of the original plaintiffs in this lawsuit to file an involuntary bankruptcy petition against Delicious Cookie. In March 1985, the bankruptcy court declared Delicious Cookie bankrupt.
Rather than further pursuing their claims in the bankruptcy court, however, the plaintiffs opted to bring this action for state law fraud and RICO violations. 18 U.S.C. Sec. 1961 et seq. They alleged that the use of DCS to provide Jacob Martin with additional security was fraudulent, and that Jonathan Martin made affirmative misrepresentations to and concealed material facts from the plaintiffs in furtherance of the scheme to defraud in violation of RICO. The sole basis for federal jurisdiction was RICO.
After five years of discovery, the defendants moved for summary judgment arguing that the plaintiffs could not show that Jonathan Martin had misrepresented facts to induce the plaintiffs to continue supplying merchandise on credit. The district court denied the motion, finding that "the evidence suggests that Jonathan Martin made false promises and misrepresentations to the plaintiffs concerning the payment of Delicious Cookie's trade debt." 1
On a motion to reconsider, the defendants argued that in light of the Supreme Court's intervening decision in H.J. Inc. v. Northwestern Bell, --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989), the plaintiffs would be unable to show at trial that the defendants engaged in a pattern of racketeering activity. The district court granted summary judgment based on this motion, relying on the Supreme Court's statement in Northwestern Bell that "predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy [the pattern] requirement...." Finding that the fraudulent activity here was limited to the last six months of 1983, the district court concluded that the scheme was closed-ended and there was no threat of continuing racketeering activity. It concluded that the scheme was a "single, short-lived attempt to achieve a single purpose in a finite period of time." As such, the court found no pattern of racketeering activity and granted summary judgment. The pendent state claims were also dismissed, and the plaintiffs appeal.
The plaintiffs raise three arguments on appeal. Their primary claim is that despite Northwestern Bell, the defendants' alleged fraudulent activities satisfy the pattern requirement of RICO. They also argue that they should be allotted more time for discovery on the pattern requirement and that the pendent counts should not have been dismissed.
We turn first to the pattern requirement. Under the RICO statute, a pattern of racketeering activity consists of at least two predicate acts of racketeering committed within a ten-year period. 18 U.S.C. Sec. 1961(5). Merely alleging two predicate acts, however, does not satisfy the pattern requirement. Sedima S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985). To establish a pattern, the plaintiff must prove continued criminal activity or a threat of continued activity (the continuity element), and a relationship between the predicate acts (the relationship element). Id.
In Northwestern Bell, the Supreme Court confirmed the "continuity plus relationship" test of Sedima. The Court considered and rejected a requirement that the defendants engage in multiple schemes to satisfy the pattern requirement. "[I]t is implausible to suppose that Congress thought [a pattern] may be shown only by proof of multiple schemes." Northwestern Bell, 109 S.Ct. at 2901. "RICO's legislative history reveals Congress' intent that to prove a pattern of racketeering activity a plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." Id. at 2900. "It is this factor, continuity plus relationship, which combines to produce a pattern." Id.
The district court held that the undisputed evidence established that the continuity element of the pattern requirement, as delineated in Northwestern Bell, was not satisfied. The Supreme Court stated in Northwestern Bell that " '[c]ontinuity' is both a closed- and open-ended concept, referring 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. Id. Alternatively, a party may prove a pattern of racketeering activity by proving a "specific threat of repetition extending indefinitely into the future" or that the "predicate acts or offenses are part of an ongoing entity's regular way of doing business." Id. at 2902. No one factor is determinative; rather, courts must examine the facts of each case to determine...
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