Papai v. Cremosnik

• Decision Date: 30 May 1986
• Docket Number: 85 C 6224(2) and 85 C 6890(3).,No. 84 C 10433(1),84 C 10433(1)
• Citation: 635 F. Supp. 1402
• Parties: Raymond A. PAPAI, Plaintiff, v. David Lonn CREMOSNIK, Karen Alton Lonn and Milton N. Zic, Defendants. DEAN FOODS CO., an Illinois corporation, Plaintiff, v. Angelo LORDIS and Penny Lordis, individuals, and Oak Lawn Marketing, Ltd., an Illinois corporation, Defendants. HALSTED VIDEO, INC., an Illinois corporation, and Joseph Mastro, Plaintiffs, v. James GUTTILLO, Paul Guttillo, Carlo Guttillo, Kevin Fitzpatrick and Michael Huels, Defendants.
• Court: U.S. District Court — Northern District of Illinois

635 F. Supp. 1402

Raymond A. PAPAI, Plaintiff, v. David Lonn CREMOSNIK, Karen Alton Lonn and Milton N. Zic, Defendants.

DEAN FOODS CO., an Illinois corporation, Plaintiff, v. Angelo LORDIS and Penny Lordis, individuals, and Oak Lawn Marketing, Ltd., an Illinois corporation, Defendants.

HALSTED VIDEO, INC., an Illinois corporation, and Joseph Mastro, Plaintiffs, v. James GUTTILLO, Paul Guttillo, Carlo Guttillo, Kevin Fitzpatrick and Michael Huels, Defendants.

Nos. 84 C 10433(1), 85 C 6224(2) and 85 C 6890(3).

United States District Court, N.D. Illinois, E.D.

May 30, 1986.

COPYRIGHT MATERIAL OMITTED

Arnold H. Landis, William H. Pratt, Mark E. Ferguson, Kirkland & Ellis, Stuart Smith, Jean Marie R. Pechette, Gordon & Glickson, Chicago, Ill., for plaintiff.

Howard J. De Pree, Bates, De Pree, Bard & Wilson, Chicago, Ill., for Milton N. Zic.

William D. Klink, Chicago, Ill., for Angelo Lordis.

Benjamin P. Hyink, Drugas, Maione, Morgan & Hyink, Chicago, Ill., for James Guttillo.

MEMORANDUM AND ORDER

MORAN, District Judge.

Three complaints alleging common law fraud and violations of the Racketeering Influenced and Corrupt Organizations Act (RICO) are pending in this court. Motions to dismiss have been filed in all three cases. Central to each is the question of what constitutes a "pattern of racketeering activity." Because the cases present similar legal issues, and this court has yet to speak on the pleading requirements of the RICO statute since the Supreme Court's decision in Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the court will address all three cases simultaneously.

I.

In Papai v. Cremosnik, et al., No. 84 C 10433, the plaintiff alleges that defendants lured him with false promises into investing in a partnership called NOW which they formed to purchase and operate a musical theater business in Phoenix, Arizona. Plaintiff claims that rather than promote the business the defendants took his money for their own use. He invested $45,000 in cash, moved to Phoenix, and worked for the partnership without compensation, all for naught. In an eleven-count complaint plaintiff alleges eight counts of securities fraud and three counts of RICO violations.

The three RICO counts are based on 18 U.S.C. §§ 1962(b), 1962(c) and 1962(d), respectively.¹ For each count the predicate racketeering acts are mail and/or telephone fraud, and the enterprise is the partnership NOW. Plaintiff is not suing the partnership as an entity, but rather sues the individual participants who are all named defendants. Because plaintiff has adequately alleged the enterprise and predicate acts elements of RICO, if he has adequately alleged a pattern of racketeering activity, he has stated a claim under RICO.

In Halsted Video, Inc., et al. v. James Guttillo, et al., No. 85 C 6890, Joseph Mastro, a shareholder but not an officer of Halsted Video, brings a derivative suit on behalf of Halsted Video against the defendants. They are all both shareholders and directors of Halsted Video, except Michael Huels, who is the company's accountant. Plaintiff alleges that defendants (except Huels) skimmed monies which belonged to the company for their own use by falsifying financial documents and failing to report income, and that Huels knowingly prepared the false statements. Plaintiff claims that defendants not only defrauded the company but also perpetuated a scheme to defraud the Internal Revenue Service. The complaint states common and state law counts of fraud, breach of fiduciary duties, misappropriation of corporate assets, negligence, conspiracy and conversion, and four counts of RICO violations.

The four RICO counts allege violations of 18 U.S.C. § 1962(c) and (d) through mail and wire and telephone fraud. For purposes of § 1962(c), the enterprise is Halsted Video, Inc. and the defendants are persons responsible for conducting the affairs of the enterprise through a pattern of racketeering activity. If plaintiff has stated a pattern, he has stated a claim under RICO.

In Dean Foods Co. v. Angelo Lordis, et al., No. 85 C 6224, plaintiff manufactures and markets dairy and other food products. Defendant Oak Lawn Marketing (Oak Lawn) is a company that distributes Dean Foods products to customers as an independent delivery contractor and also purchases Dean products for resale to Oak Lawn's own customers. Defendants Angelo Lordis and Penny Lordis own 100 per cent of the shares of Oak Lawn. Plaintiff claims that defendants falsified delivery receipts causing Dean to overbill some customers, overpay Oak Lawn, and give it credit for products which it never delivered. Plaintiff brings four common and state law counts for fraud, conversion, unjust enrichment and constructive trust, and one count alleging a RICO violation.

The predicate acts of the RICO count are mail fraud. The enterprise is the association formed by Oak Lawn, Angelo Lordis and Penny Lordis. Unhappily, plaintiff does not specify the subsections of 18 U.S.C. § 1962 on which it relies. Each section has different requirements. In particular, § 1962(c) requires a difference in identity between the person and the enterprise, but § 1962(a) does not.² Haroco, Inc. v. American National Bank and Trust Company of Chicago, 747 F.2d 384, 400-02 (7th Cir.1984), aff'd 473 U.S. ___, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985); see also B.F. Hirsh v. Enright Refining Company, Inc., 751 F.2d 628, 633 (3d Cir.1984). As the court in Haroco explained, subsection (a) imposes liability on the enterprise when it is the "direct or indirect beneficiary of the pattern of racketeering activity, but not when it is merely the victim, prize or passive instrument of racketeering," in which case subsection (c) applies. Id. at 402. Because of these differences a party should state clearly under which subsection he is suing rather than force the courts and the defendant to decide.

Plaintiff argues in its brief in opposition to defendants' motion to dismiss that its complaint states a RICO claim under either § 1962(a) or (c). The language of the complaint would comport with § 1962(c) if we assume that Angelo Lordis and Penny Lordis are the "persons" and Oak Lawn is the "enterprise." See McCullough v. Suter, 757 F.2d 142 (7th Cir.1985). However, paragraph 12 of the complaint says:

Oak Lawn Marketing is the "alter ego" of Angelo and Penny Lordis. Dean is informed and believes that Angelo and Penny Lordis have operated and do operate Oak Lawn marketing solely for their own pecuniary benefit, and without adequate capitalization. Dean is informed and believes that defendants Angelo Lordis and Penny Lordis have used Oak Lawn Marketing as their agent in perpetuating the wrongful conduct described below. Adhering to the legal fiction that Oak Lawn Marketing is a separate entity would work an injustice upon Dean.

Further, the complaint hardly casts Oak Lawn as a victim of the Lordises' racketeering activity. In fact, Oak Lawn is cast as the beneficiary of the Lordises' fraud, which would state a claim under § 1962(a). However, the plaintiff has failed to allege that defendants used "income" derived from their pattern of racketeering activity to conduct Oak Lawn's business. Plaintiff argues that it has so alleged in paragraph 25 of the complaint, which states:

On information and belief, defendants have wrongfully converted products obtained from Dean ostensibly for delivery to Dean's customers. Specifically, Dean is informed and believes that defendants have sold for their own benefit products claimed to have been delivered to Dean customers. Dean is informed and believes that defendants have sold these fraudulently obtained products to distribution customers of Oak Lawn Marketing and/or other purchasers.

A broad definition of income under the statute would include not only money but also fraudulently obtained goods which the business in turn sold. However, paragraph 25 is not incorporated into the RICO count. Because it is unclear whether plaintiff relies on § 1962(a) or (c), the court dismisses the complaint (the RICO count is the only federal claim) with leave to amend to clarify this issue, as well as allege how defendants' acts constitute a "pattern of racketeering activity," see infra pp. 1413 to 1414.³

II.

RICO, passed as Title IX of the Organized Crime Control Act of 1970, Pub.L. 91-452, 84 Stat. 941, is a broadly worded statute whose purpose is to provide a private civil remedy to those injured by the infiltration of organized crime into the legitimate business arena. RICO's substantive provision, 18 U.S.C. § 1962, "is violated by any person associated with an enterprise, the activities of which affect commerce, who conducts the enterprise's affairs through a pattern of racketeering activity." Illinois Department of Revenue v. Phillips, 771 F.2d 312, 313 (7th Cir.1985). Each element in a RICO count must be pled to state a claim, Sedima, 105 S.Ct. at 3285; each must also be proved in order to establish liability. Cf. United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981) (while proof used to establish the "enterprise" and the "pattern of racketeering activity" may coalesce, each is a "separate element which must be proved").

Litigants, in an effort to avoid the use of RICO against them, and courts, in an effort to dam the flood of civil RICO cases which on their face look like basic common law breach of contract and fraud cases, have tried to embellish (and thereby narrow) each of the RICO elements. One such effort was the imposition of a "racketeering enterprise injury" requirement on top of the statutory requirement of a showing of injury resulting from an enterprise being conducted through a pattern of racketeering activity. See, e.g., Alexander Grant & Company v. Tiffany Industries, Inc., 742 F.2d 408 (8th Cir.1984). The Supreme Court has rejected this reading of RICO in Sedima, supra. An attempt to limit "enterprise" to only ...