Rylewicz v. Beaton Services, Ltd.

• Decision Date: 01 November 1989
• Docket Number: No. 88-2725,88-2725
• Parties: , RICO Bus.Disp.Guide 7351 Richard RYLEWICZ, Thomas Cummings and Barbara Cummings, Plaintiffs-Appellants, v. BEATON SERVICES, LTD., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1175

888 F.2d 1175

58 USLW 2360, RICO Bus.Disp.Guide 7351

Richard RYLEWICZ, Thomas Cummings and Barbara Cummings, Plaintiffs-Appellants, v. BEATON SERVICES, LTD., et al., Defendants-Appellees.

No. 88-2725.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 12, 1989.

Decided Nov. 1, 1989.

Lowell E. Sachnoff, Sachnoff, Weaver & Rubenstein, Jeffrey T. Gilbert, Clifford J. Shapiro, Sachnoff & Weaver, Arnold A. Pagniucci, Sachnoff, Weaver & Rubenstein, Theodore M. Becker, J. Samuel Tenenbaum, Tenenbaum & Senderowitz, Chicago, Ill., for plaintiffs-appellants.

Michael S. Blazer, Barnett & Associates, James Figliulo, Steven H. Gistenson, Foran, Wiss & Schultz, Thomas J. Reed, Patricia A. Korn, Bruce C. Howard, Michael P. Connelly, Chadwell & Kayser, Chicago, Ill., Richard G. Schultz, James Figliulo, Foran, Wiss & Schultz, Alan H. Silberman, Sonnenschein, Carlin, Nath & Rosenthal, Evan A. Burkholder, John M. Hughes, Lord, Bissell & Brook, Michael H. King, Kurt H. Feuer, Eric S. Palles, Ross & Hardies, Chicago, Ill., for defendants-appellees.

Before BAUER, Chief Judge, CUMMINGS and WOOD, Jr., Circuit Judges.

CUMMINGS, Circuit Judge.

This lawsuit stems from a state court trial of fraud and breach of contract claims. Following a $52 million jury verdict in favor of a company with which they were associated, Thomas Cummings and his wife Barbara Cummings filed an amended complaint in federal court, claiming that the losing parties to the suit had conducted a campaign of harassment and intimidation against them in violation of federal racketeering and civil rights statutes. Co-plaintiff Richard Rylewicz alleged that some defendants had violated the federal credit reporting statute. In a Memorandum Opinion and Order reported at 698 F.Supp. 1391 (N.D.Ill.1988), the district court dismissed the Cummingses' Counts I and II of the suit on standing grounds, dismissed certain defendants from Rylewicz's Count III because the applicable statute of limitations had lapsed, and relinquished jurisdiction as to Count IV, a pendent state claim brought against McDonald's by the Cummingses. Rylewicz and the Cummingses have appealed from the ensuing judgment. We affirm each of the district court's rulings.

BACKGROUND

Central Ice Cream Co. ("Central") obtained a verdict of $52 million from defendant McDonald's Corporation and McDonald's System, Inc. ("McDonald's") on January 20, 1984, following a thirteen-week trial in the Circuit Court of Cook County, Illinois. Plaintiff Thomas N. Cummings was president of Central, which was by the time of the verdict bankrupt and under the stewardship of a trustee. Co-plaintiff Barbara Cummings is his wife and was a substantial stockholder of Central. The third plaintiff, Richard Rylewicz, is the Cummingses' personal accountant.

On June 20, 1985, before judgment was entered in the breach of contract case and while a post-trial motion seeking judgment notwithstanding the verdict or a new trial was pending with the state trial court, the parties agreed to settle at a large discount from the verdict. The settlement provided for McDonald's to pay a total of $15.5 million plus interest during the pendency of any appeals. The Cummingses and their attorneys were to receive $4 million and Central and its counsel were to receive $11.5 million. Central was then in liquidation under Chapter 7 of the Bankruptcy Code, with Bernard C. Chaitman as trustee. Though he had participated in the state court trial as Central's representative, Thomas Cummings was not a party to the state court or bankruptcy proceedings.

On June 28, 1985, the trustee filed an application for bankruptcy court approval of the settlement agreement. Three weeks later, he applied for approval of an amended settlement agreement. The new agreement provided for payment of $15.5 million to Central without making any allocation to the Cummingses or securing any release from them. This amended settlement agreement was approved by the bankruptcy judge on October 9, 1985. In re Central Ice Cream Co., 59 B.R. 476 (Bankr.N.D.Ill.1986). In that opinion, resolving several aspects of a conflict that has so far spawned at least five reported cases not counting this one, Judge Schmetterer explained at some length why the substitute settlement agreement should be approved as being in the best interest of Central's estate and its creditors. 59 B.R. at 484-488.

The Cummingses, among others, appealed to the district court from the bankruptcy judge's order approving the settlement. District Judge Leinenweber granted the trustee's motion to dismiss, holding that only the trustee had standing to appeal. In re Central Ice Cream Co., 62 B.R. 357 (N.D.Ill.1986). Two of the shareholders, Joan Rafel and George Kamberos, pressed an appeal from the district court's dismissal. This Court summarily affirmed on January 29, 1987, and the estate collected the proceeds. See Matter of Central Ice Cream Co., 836 F.2d 1068, 1071 (7th Cir.1987). ¹

On December 23, 1985, plaintiff Richard Rylewicz filed the original federal suit against three principal defendants, claiming that they had violated the Fair Credit Reporting Act, 15 U.S.C. Sec. 1681, by requesting a consumer credit report about him for a false purpose. Rylewicz asserted that the defendants actually intended to obtain information about him "for use in connection with the pending lawsuit involving a corporation," subsequently identified as Central Ice Cream Co., in which he and some of his clients purportedly held undefined interests. This suit sought $50,000 in actual damages and $100,000 in punitive damages.

On May 29, 1986, the first amended complaint was filed, greatly broadening the scope of the action and the assemblage of parties. ² In the amended complaint, the Cummingses joined Rylewicz as plaintiffs and added McDonald's Corporation, its chairman, and its general counsel as defendants. In Count III Rylewicz repeated the allegations of his first complaint under the Fair Credit Reporting Act, but specified for the first time that the information sought about him was to be used "in connection with the Central Ice Cream litigation."

Count I of the amended complaint was brought by the Cummingses, claiming that defendants had engaged in various acts of "harassment, intimidation and terrorism" against them and their daughter Lydia in order to influence Thomas Cummings' testimony in the bankruptcy court and to force the Cummingses to accede to a compromise of the jury verdict in the Central Ice Cream litigation. The Cummingses alleged that the defendants thereby engaged in a pattern of racketeering in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968. This Count sought $54 million in damages plus trebling pursuant to 18 U.S.C. Sec. 1965(c).

Count II claimed that the Cummingses' civil rights were violated by the conduct alleged in Count I. Damages equal to those under Count I were sought on the basis of 42 U.S.C. Secs. 1985(2) and 1986. Count III was Rylewicz's claim under the Fair Credit Reporting Act, which survived from the original complaint.

Count IV was a new pendent breach of contract claim brought by the Cummingses and asserting that McDonald's violated the settlement agreement of June 20, 1985, under which it was to pay $4 million to the Cummingses subject to approval of the bankruptcy court. This agreement was allegedly breached by the amended settlement agreement that awarded nothing to the Cummingses. Under this Count, the Cummingses sought $4 million in damages.

On July 21, 1988, the district judge handed down her Memorandum Opinion and Order, which properly took the factual allegations in the amended complaint to be true in considering defendants' motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). 698 F.Supp. at 1393. Even using that standard, the district court determined that Count I should be dismissed largely because the Cummingses "have failed to allege that the defendants directly caused them to suffer a compensable RICO injury." Id. at 1396.

The district court then dismissed Count II because the damage provision of 42 U.S.C. Sec. 1985(3) only provides relief to parties, and Thomas Cummings was not a party to the bankruptcy court proceedings. 698 F.Supp. at 1398. Since the Cummingses failed to state a claim under Section 1985, the court ruled that they were precluded from stating a treble damage claim under 42 U.S.C. Sec. 1986, which is expressly tied into Section 1985. Id.

As to Rylewicz's Fair Credit Reporting Act claim, Judge Williams held that the two-year statute of limitations contained in 15 U.S.C. Sec. 1681p barred suit against defendants McDonald's, Turner, Yastrow, Burke, Intertel, and Desnoyers & Associates. 698 F.Supp. at 1399-1400. The defendants' motion to dismiss Count III was denied, however, as to defendants Beaton Services, Ltd., United States Security Services Corporation, and Financial and Technical Investigations, Inc. because the action against those defendants was sufficiently timely.

Finally, the district court relinquished jurisdiction over the alleged breach by McDonald's of the earlier settlement contract involved in Count IV, which was a pendent state law claim. Since all the federal claims against McDonald's had been dismissed, the court was left without a federal question to be decided. 698 F.Supp. at 1401. Plaintiffs filed a notice of appeal on September 1, 1988.

I. RICO

The initial Count of the first amended complaint is by far the lengthiest. Stripped of its extraneous allegations, the gravamen of the Count is that McDonald's attempts to cause Central Ice Cream to settle its $52 million state court jury verdict against McDonald's for $15.5 million violated RICO, specifically 18 U.S.C. Secs. 1962(c) and 1962(d).

The fatal defect in this Count is that only the directly injured party, Central, can bring such a suit, as was explained by the district court. 698...