PMF Services, Inc. v. Grady

• Decision Date: 10 March 1988
• Docket Number: No. 87 C 9113.,87 C 9113.
• Citation: 681 F. Supp. 549
• Parties: P.M.F. SERVICES, INC. and Richard Rueth, Plaintiffs, v. Daniel J. GRADY, Lynn Grady, Mount Greenwood Bank, and The Northern Trust Company, Defendants.
• Court: U.S. District Court — Northern District of Illinois

681 F. Supp. 549

P.M.F. SERVICES, INC. and Richard Rueth, Plaintiffs, v. Daniel J. GRADY, Lynn Grady, Mount Greenwood Bank, and The Northern Trust Company, Defendants.

No. 87 C 9113.

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

March 10, 1988.

Michael R. Collins, Harold E. Collins & Assocs., Ltd., Chicago, Ill., for plaintiffs.

Denise M. Higgins, Burke & Burke, Ltd., Chicago, Ill., for Mt. Greenwood.

Claudia J. Lovelette and Angela S. Curran, Burke, Bosselman & Weaver, Chicago, Ill., for Northern Trust Co.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

P.M.F. Services, Inc. ("P.M.F.") and Richard Rueth ("Rueth") have sued Daniel Grady, individually and doing business as PMF Services ("Grady"),¹ his wife Lynn Grady, Mount Greenwood Bank ("Mt. Greenwood") and the Northern Trust Company ("Northern"), alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") as well as state law claims of conversion and negligence.² Mt. Greenwood and Northern have moved to dismiss the Complaint as to them under Fed.R.Civ.P. ("Rule") 12(b)(6) for failure to state a claim on which relief may be granted and, in the case of Mt. Greenwood, under Rule 9(b) for failure to plead fraud with particularity. For the reasons stated in this memorandum opinion and order, Mt. Greenwood's motion is granted in its entirety and Northern's motion to dismiss the conversion count is granted. Northern's motions to dismiss or for a more definitive statement of the negligence count are denied.

FACTS³

P.M.F. is an Indiana corporation (¶ 2). Rueth is identified only as a citizen of Indiana. His relationship to P.M.F. is not alleged, although he "has been caused to expend and become liable for large sums of money necessary to finance and continue the business of P.M.F." (¶ I.23). Illinois citizen Grady was an employee of P.M.F. Finally, Mt. Greenwood and Northern are Illinois banking companies.

In April 1986 Grady opened an account at Mt. Greenwood as a sole proprietor doing business as "PMF Services" (¶ I.8). From then through August 1987 he stole checks belonging to P.M.F.,⁴ transported them to Illinois and deposited them in his Mt. Greenwood account (¶¶ I.9, 10). Grady later withdrew funds from the account for his benefit and that of his wife (¶ I.13).

Nothing in the Complaint indicates how many checks Grady stole or deposited or how many withdrawals he made. Its ¶ I.11 asserts Mt. Greenwood "knew or should have known" the checks were stolen and that accepting those checks therefore violated 18 U.S.C. § 2315 ("Section 2315"). Similarly, its ¶ I.12 asserts Mt. Greenwood sent statements on Grady's "PMF Services" account to Grady's home rather than to P.M.F., thereby furthering a fraudulent scheme in violation of the mail fraud statute (18 U.S.C. § 1341 or "Section 1341"). Mt. Greenwood profited from the scheme through the service charges on Grady's account and by investing the account balance (¶ I.21).

Northern's alleged involvement was less extensive than that of Mt. Greenwood. It was the payor bank⁵ on numerous checks it paid over the forged endorsement of P.M.F. (¶ IV.1.).

CONTENTIONS OF THE PARTIES

Plaintiffs say those allegations state these RICO claims against Mt. Greenwood:

1. Mt. Greenwood participated directly and indirectly in the conduct of P.M.F. through a pattern of racketeering activity in violation of RICO § 1962(c).

2. Mt. Greenwood maintained an interest in and control over P.M.F. through a pattern of racketeering activity in violation of RICO § 1962(b).

3. Mt. Greenwood invested its income from the account in its own operations in violation of RICO § 1962(a).

Because each violation assertedly injured P.M.F. and Rueth in their business and property, under Complaint Count I they assert liability under RICO § 1964(c).

P.M.F. also says Mt. Greenwood converted P.M.F.'s checks by accepting Grady's forgeries (Count III) and negligently breached its duty of reasonable care to P.M.F. when it negotiated checks under a forged endorsement (Count V). P.M.F. says Northern converted its funds by paying on the forged P.M.F. endorsement (Count IV) and was also negligent in doing so (Count V).

Mt. Greenwood raises six challenges to the RICO count:

1. Rueth's claim must be dismissed because it is not alleged he was directly harmed by any RICO violation.

2. Allegations of the predicate offenses—mail fraud and receiving stolen property—are insufficient.

3. There is no allegation of a pattern of racketeering activity.

4. P.M.F. was not harmed "by reason of" Mt. Greenwood's investment in itself, so the claim based on RICO § 1962(a) fails.

5. Mt. Greenwood had no "interest" or "control" over P.M.F., so the claim based on RICO § 1962(b) fails.

6. Mt. Greenwood did not participate in or conduct the affairs of P.M.F., so the claim based on RICO § 1962(c) fails.

As for the conversion claims, each of Mt. Greenwood and Northern contends the Complaint does not adequately allege the necessary elements of such an action. Finally, as to the negligence claims, Mt. Greenwood says it had no duty of reasonable care to P.M.F. (a predicate for negligence liability), while Northern says the negligence count is too vague to state a claim.

RICO

RICO § 1964(c) creates a private cause of action for "any person injured in his business or property by reason of a violation of section 1962." Pleading RICO violations and the consequent private cause of action is a legal field strewn with pitfalls. Plaintiffs' counsel has managed to land in many of them. As will be seen, many of the problems represent pleading errors rather than the legal impossibility of pleading RICO violations, so counsel may perhaps be entitled to another try.

1. Rueth's RICO Standing

As already pointed out, all the Complaint alleges about the relationship between Rueth and P.M.F. is that Rueth became liable for large sums "to finance and continue the business of P.M.F." (¶ I.23). No acts by Mt. Greenwood are asserted to have caused direct (rather than purely derivative) harm to Rueth. When Mt. Greenwood pointed out that deficiency, plaintiffs ignored the issue. Perhaps Rueth can allege facts that would establish his entitlement to recovery under RICO (though that appears doubtful from the nature of the banks' alleged misdeeds⁶), but the current Complaint does not even attempt to do so. Rueth is dismissed as a Count I plaintiff.

2. Predicate Offenses

To recover under RICO, P.M.F. must show it was harmed by a "pattern of racketeering activity." As the next section of this opinion reflects, this Court need not fully retrace the tortuous path that concept has followed (and continues to wend) through the federal courts. For the moment it is enough to say P.M.F. alleges multiple violations of 18 U.S.C. §§ 1343 and 2315, each of which is a predicate offense (see RICO § 1961(1)).

When alleged predicate offenses sound in fraud, Rule 9(b) requires pleading "with particularity" (Haroco v. American National Bank and Trust Co. of Chicago, 747 F.2d 384, 405 (7th Cir.1984), aff'd on other grounds, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985)). That requirement clearly applies to the Complaint's allegations of mail fraud, and just as clearly that requirement has not been met here. As this Court's former colleague Honorable Susan Getzendanner stressed in McKee v. Pope Ballard Shepard & Fowle, Ltd., 604 F.Supp. 927, 930-31 (N.D.Ill.1985) (citations omitted):

At the least, a plaintiff pleading fraud must "specify the time, place and contents of any alleged false representations, and the full nature of the transaction." ... This should include the identity of the person making the misrepresentations, and how the misrepresentations were communicated to the plaintiff.... The identity of those making the misrepresentations is crucial. Courts have been quick to reject pleadings in which multiple defendants are "lumped together" and in which no defendant can determine from the complaint which of the alleged misrepresentations it is specifically charged with having made, nor the identity of the individual by whom and to whom the statements were given, nor the situs and circumstances of the conversation, nor ... the date of the utterance.

P.M.F.'s Complaint fails on every item identified in McKee.

P.M.F. apparently seeks to cure those defects by appending to its memorandum copies of hundreds of checks it says were either deposited in or drawn on Grady's Mt. Greenwood account. Of course the issue on a Rule 12(b)(6) motion is the sufficiency of the Complaint, not whether P.M.F. can ultimately provide evidence to support liability. Because the complaint does not allege mail fraud with particularity, those portions must be dismissed.⁷

More critically, Mt. Greenwood also says P.M.F. has not properly alleged use of the mails to further the fraud.⁸ In that respect P.M.F. relies entirely on Mt. Greenwood's mailing of the account statements to Grady. P.M.F. says those mailings furthered the fraudulent scheme because, if the statements had been sent to P.M.F. rather than Grady, it would have discovered Grady's fraud earlier. Even if that last contention were assumed to be correct, it remains true that P.M.F. really complains of the bank's nonmailing to it—the failure to mail—and not of the mailing itself. That may readily be seen from the fact that if Mt. Greenwood had mailed copies of the statements to both P.M.F. and Grady's PMF Services, P.M.F. would have had no complaint. Thus in "mail fraud" terms the situation is no different than if Mt. Greenwood had simply done nothing. Nor is this a purely formal difference. Federal mail fraud requires the use of the mails as a jurisdictional prerequisite. Nonuse of the mails cannot confer federal jurisdiction, for that means commerce is not involved.

P.M.F. offers nothing at all to support its impermissibly extended (and strained) version of the mail fraud concept in that respect.⁹ Its mail fraud allegations are therefore...