Shearin v. E.F. Hutton Group, Inc.

• Decision Date: 27 July 1989
• Docket Number: No. 89-3230,89-3230
• Parties: RICO Bus.Disp.Guide 7318 K. Kay SHEARIN, Appellant, v. The E.F. HUTTON GROUP, INC., E.F. Hutton & Company Inc. and E.F. Hutton Trust Company, Appellees. . Submitted Under Third Circuit Rule 12(6),
• Court: U.S. Court of Appeals — Third Circuit

Page 1162

885 F.2d 1162

RICO Bus.Disp.Guide 7318

K. Kay SHEARIN, Appellant, v. The E.F. HUTTON GROUP, INC., E.F. Hutton & Company Inc. and E.F. Hutton Trust Company, Appellees.

No. 89-3230.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6),

July 27, 1989.

Decided Sept. 20, 1989.

As Amended Oct. 11, 1989.

K. Kay Shearin, Wilmington, Del., pro se.

Stephen E. Herrman, Anne C. Foster, Richards, Layton & Finger, Wilmington, Del., for appellees.

Before GIBBONS, Chief Judge, HUTCHINSON, Circuit Judge, and REED, District Judge. ^*

OPINION OF THE COURT

GIBBONS, Chief Judge:

Plaintiff K. Kay Shearin, a former employee of E.F. Hutton Trust Company (Hutton Trust), appeals from a judgment dismissing her amended complaint against Hutton Trust, E.F. Hutton & Company Inc. (Hutton Inc.) and The E.F. Hutton Group, Inc. (Hutton Group). The complaint alleges that the defendants violated the Racketeer Influenced and Corrupt Organizations statute (RICO), 18 U.S.C. Secs. 1961-1968 (1989), in four respects, and that those violations injured her in a manner for which that act provides a remedy. 18 U.S.C. Sec. 1964(c). The district court held that, assuming her amended complaint properly pleaded violations of 18 U.S.C. Sec. 1962, Shearin lacked standing to assert a claim under 18 U.S.C. Sec. 1964 for damages for any such violations. We conclude that while the district court properly dismissed with respect to three of the alleged violations, it erred in holding that Shearin lacks standing to pursue a civil RICO remedy for the alleged violation of 18 U.S.C. Sec. 1962(d). Thus we will reverse the judgment appealed from and remand for further proceedings.

I.

Shearin's amended complaint alleges that on April 30, 1984, she was hired by Hutton Trust as Trust Counsel, Corporate Secretary, and Assistant Vice President. Hutton Trust is a limited purpose trust company organized under Del.Code Ann. tit. 5, Secs. 773-779 (1988), with its principal place of business in Wilmington, Delaware. Hutton Trust and Hutton Inc., a brokerage firm, were at relevant times wholly-owned subsidiaries of Hutton Group. In April of 1985 Shearin was promoted to Vice President of Hutton Trust. On March 6, 1986, she was dismissed.

Shearin alleged that Hutton Inc. and Hutton Group agreed upon a scheme whereby Hutton Trust would be created as a front for the purpose of charging fees to customers of Hutton Inc. for trust services which were never performed, thereby bilking customers of the brokerage firm. Pursuant to this scheme, Shearin alleges, she was induced by telephone and mail to leave her previous employment and enter into an employment contract with Hutton Trust so that it would have the facade of a genuine trust company. In March of 1986, she alleges, she was abruptly dismissed in order to prevent her from making disclosures about the defendants' illegal activities to the Delaware bank examiners.

Shearin pleads that the defendants have thereby violated 18 U.S.C. Sec. 1962(a), (b), (c) and (d). These violations are actionable, she pleads, under 18 U.S.C. Sec. 1964(c), which provides:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.

Recovery under section 1964(c) thus requires the pleading of (1) a section 1962 violation, and (2) an injury to business or property by reason of such violation. The latter pleading requirement is in common parlance referred to as RICO standing.

Our review of the dismissal of Shearin's complaint is plenary. ¹ Accepting Shearin's allegations as true we must determine whether she has alleged any set of facts which would entitle her to recover under 18 U.S.C. Sec. 1964(c).

A. Shearin Pleaded RICO Violations

Shearin alleges that the defendants (1) used money derived from a pattern of racketeering to invest in an enterprise, 18 U.S.C. Sec. 1962(a); (2) conducted an enterprise through a pattern of racketeering, 18 U.S.C. Sec. 1962(c); and (3) conspired to violate sections 1962(a) and (c) in violation of 18 U.S.C. Sec. 1962(d).

(1) Section 1962(a)

Shearin's complaint adequately alleges that the Hutton companies used money derived from a pattern of racketeering to invest in an enterprise. The statute in relevant part provides:

It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of any unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.

18 U.S.C. Sec. 1962(a). Under this provision a plaintiff must allege: (1) that the defendant has received money from a pattern of racketeering activity, and (2) invested that money in an enterprise; and (3) that the enterprise affected interstate commerce. B.F. Hirsch, Inc. v. Enright Refining Co., 617 F.Supp. 49, 51-52 (D.N.J.1985); see Gilbert v. Prudential-Bache Sec., Inc., 643 F.Supp. 107, 109 (E.D.Pa.1986).

At least two paragraphs of Shearin's amended complaint set out the receipt of money from the pattern of racketeering activity. Paragraph 15 states that during Shearin's employment, Hutton Inc. employees collected fees charged for Hutton Trust's services. p 15(e). To the extent that the Hutton Group owned Hutton Inc. and ostensibly established Hutton Trust to get such fees, a liberal inference is that the parent received at least some of these illicit funds as well. p 13. Finally, the complaint indicates that Hutton Trust also received illicit funds in its own right in collecting fees from trusts established outside Delaware. p 15(i). Each defendant thus received funds from the scheme according to the facts alleged.

The complaint also indicates investment in the Huttons' tripartite enterprise. Paragraph 15 alone suffices in alleging that Hutton Inc. employees transferred the Hutton Trust fees they collected into Hutton Inc. accounts. In this way, an investment went to one of the three constituent members of the fraudulent association. p 15(e). Any degree to which it can be inferred that the Hutton Group ultimately retained funds from Hutton Trust via Hutton Inc. merely bolsters the investment allegation. p 13.

Contrary to the district court's dicta, the enterprise and the individual defendant need not be distinct for the purposes of section 1962(a). Petro-Tech, Inc. v. Western Co. of N.A., 824 F.2d 1349, 1360 (3d Cir.1987).

(2) Section 1962(c)

Shearin alleges that the defendants conducted an enterprise through a pattern of racketeering. The statute provides:

(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

18 U.S.C. Sec. 1962(c). There are four elements under this provision necessary to make out a claim; a plaintiff must allege (1) the existence of an enterprise affecting interstate commerce; (2) that the defendant was employed by or associated with the enterprise; (3) that the defendant participated, either directly or indirectly, in the conduct or the affairs of the enterprise; and (4) that he or she participated through a pattern of racketeering activity that must include the allegation of at least two racketeering acts. R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350, 1352 (5th Cir.1985); see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). Given this Court's lenient standard in reviewing complaints, Shearin's allegations pass muster on each item. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir.1988).

Shearin pleaded the existence of an enterprise. Paragraph 14 of the complaint states that "the association of Hutton Group, Hutton Inc., and Hutton Trust ... was an enterprise under 18 U.S.C. 1861(4) [sic]." This allegation fits the statutory definition of an enterprise as including "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. Sec. 1961(4). Interpretation of this term has been liberal, and nothing precludes an association of corporations for illicit purposes from constituting an enterprise. See, e.g., United States v. Feldman, 853 F.2d 648, 655 (9th Cir.1988). Shearin did not expressly allege that the enterprise has affected interstate commerce, but that failure is immaterial. The requirement may be reasonably inferred from the interstate nature of Hutton Inc., p 3, and from Hutton Inc.'s alleged misrepresentations that Hutton Trust was authorized to do business outside the state of Delaware, p 15(i) & (j). The interstate requirement is de minimis in any case. See, e.g., R.A.G.S. Couture, 774 F.2d at 1353.

Shearin by definition met the association requirement in pleading that the three Hutton companies associated to form an enterprise, p 14. Beyond this, many of the allegations of their participation in the affairs of the enterprise also go to their continuing association with it. The complaint makes ample allegation, general and specific, of the three companies' participation in and conduct of the affairs of their tripartite enterprise. These allegations include: the payment of Hutton Trust employees with Hutton Inc. funds, p 15(b); the...