Torwest DBC, Inc. v. Dick

• Citation: 810 F.2d 925
• Decision Date: 20 January 1987
• Docket Number: No. 86-1450,86-1450
• Parties: Fed. Sec. L. Rep. P 93,106, RICO Bus.Disp.Guide 6507 TORWEST DBC, INC., a Colorado Corporation, Plaintiff-Appellant, v. John W. DICK, Werner C. Heinrichs, William B. Pauls, Canusa Investments (CI) Ltd., a Jersey, Channel Islands Corporation, and Barclays Bank of Canada, a Canadian Corporation, Defendants- Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 925

810 F.2d 925

Fed. Sec. L. Rep. P 93,106, RICO Bus.Disp.Guide 6507

TORWEST DBC, INC., a Colorado Corporation, Plaintiff-Appellant, v. John W. DICK, Werner C. Heinrichs, William B. Pauls, Canusa Investments (CI) Ltd., a Jersey, Channel Islands Corporation, and Barclays Bank of Canada, a Canadian Corporation Defendants- Appellees.

No. 86-1450.

United States Court of Appeals Tenth Circuit.

Jan. 20, 1987.

G. Robert Blakey, of counsel, Notre Dame Law School, Notre Dame, Indiana (F. Kelly Smith and Gary T. Cornwell of McGuire, Cornwell & Blakey, Denver, Colo., on the brief), for plaintiff-appellant.

David A. Zisser (Terence P. Boyle with him on the brief), of O'Connor & Hannan, Denver, Colo., for defendant-appellee Dick.

Bruce D. Pringle (James A. Clark, with him on the brief) of Baker & Hostetler, Denver, Colo., for defendants-appellees Heinrichs and Canusa Investments.

Charles F. Brega of Roath & Brega, P.C., Denver, Colo., filed a brief, for defendant-appellee Pauls.

Before SEYMOUR, SETH, and ANDERSON, Circuit Judges.

SEYMOUR, Circuit Judge.

Torwest DBC, Inc. brought this action against John Dick, Werner Heinrichs, William Pauls, Canusa Investments Ltd., and Barclays Bank of Canada, asserting claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961-1968 (1982) (RICO). Defendants moved to dismiss, ¹ asserting that Torwest DBC had failed to allege adequately the elements of a RICO claim. With the agreement of the parties, the district court treated defendants' motions to dismiss as motions for summary judgment under Fed.R.Civ.P. 56 and accepted the statement of the facts contained in Torwest DBC's brief as true for purposes of the ruling. The court then granted the motions and dismissed the action. See Torwest DBC, Inc. v. Dick, 628 F.Supp. 163 (D.Colo.1986). We affirm.

I.

The allegations of the complaint and the accepted statement of facts establish that in February 1974, defendants Dick, Heinrichs, and Pauls, through a corporation named Vace Securities, entered into an agreement with Great-West Life Assurance Company to form Torwest Properties, a corporation created to acquire and develop real property. Vace and Great-West shared the Torwest stock equally, and each could place three members on the Torwest board of directors. Vace named Dick, Heinrichs, and Pauls to the board, and Heinrichs became president. Vace was to find new properties for acquisition by Torwest, and to pursue development of the acquired properties. Great-West was to capitalize Torwest's investments.

In October 1977, Dick, Heinrichs, and Pauls formed Canusa Investments Ltd. through nominees, for the purpose of acquiring on behalf of the individual defendants a secret interest in the Denver Business Center (DBC) and then selling DBC to Torwest at a profit. Canusa purchased DBC for a total price of $5,400,000, and thereafter gave Dick an exclusive option to purchase the DBC property for $12,650,000. This figure included a $6,000,000 participation interest held by Canusa, which was to be satisfied by payment of fifty percent of the proceeds from the development of individual DBC parcels.

Dick and Heinrichs proposed to the Torwest board that Torwest purchase DBC, representing to the board that Canusa was owned by Barclays Canada. The board voted in favor of this recommendation, and formed a new corporation, Torwest DBC, to acquire and develop DBC. All three individual defendants were directors of Torwest DBC, which approved the acquisition of DBC. Under the purchase agreement, Torwest DBC made a cash down payment of $1,250,000, assumed mortgages and deeds of trust, and executed a promissory note, secured by a mortgage, to cover the $6,000,000 Canusa was to derive from its participation interest. As a result of these transactions, Dick, Heinrichs, and Pauls received an immediate secret profit through Canusa of $1,250,000, and a potential additional profit of $6,000,000 as individual DBC parcels were developed and sold. Canusa subsequently assigned its interest in the $6,000,000 participation note to Adviso Holding B.V., a nominee-chartered corporation that represented the interests of Dick, Heinrichs, and Pauls.

By the end of 1980, Torwest became dissatisfied with the efforts of Dick, Heinrichs, and Pauls to develop DBC, and removed them from the boards of Torwest and Torwest DBC. Following their departure, Adviso began to challenge the computation of the participation interest profits and ultimately sued Torwest DBC. That suit brought about discovery of the role Dick, Heinrichs, and Pauls had played through Canusa and Adviso in the DBC transaction, and precipitated the instant litigation.

Based on these allegations, Torwest DBC asserted that Dick, Heinrichs, and Pauls had conspired to conduct and had conducted the affairs of an enterprise through a pattern of racketeering activity within the meaning of RICO. The district court concluded that Torwest DBC's allegations and statement of facts did not show the pattern of racketeering activity required for the substantive count, and that the alleged conspiracy to commit the substantive violation must therefore be dismissed as well. The focus of our inquiry on appeal is the often litigated and troublesome issue of whether the factual allegations are sufficient to set out a pattern of racketeering activity within the ambit of RICO.

II.

Section 1962(c), the substantive RICO violation at issue here, states that

"[i]t 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). ² A violation of section 1962(c) thus "requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). RICO defines racketeering activity as, inter alia, any act that is indictable under 18 U.S.C. Sec. 1341 (mail fraud) or 18 U.S.C. Sec. 1343 (wire fraud). See 18 U.S.C. Sec. 1961(1)(B). RICO also states that a " 'pattern of racketeering activity' requires at least two acts of racketeering activity." 18 U.S.C. Sec. 1961(5).

The Supreme Court has pointedly observed that "[t]he 'extraordinary' uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, in particular the inclusion of wire, mail, and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of 'pattern.' " Sedima, 105 S.Ct. at 3287. The Court noted in Sedima that the RICO definition of pattern implies that "while two acts are necessary, they may not be sufficient," id. at 3285 n. 14, and pointed to the Act's legislative history indicating the type of activity Congress intended RICO to encompass.

"As the Senate Report explained: 'The target of [RICO] is thus not sporadic activity. The infiltration of legitimate business normally requires more than one "racketeering activity" and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.' S.Rep. No. 91-617, p. 158 (1969) (emphasis added). Similarly, the sponsor of the Senate bill, after quoting this portion of the Report, pointed out to his colleagues that '[t]he term "pattern" itself requires the showing of a relationship.... So, therefore, proof of two acts of racketeering activity, without more, does not establish a pattern....' 116 Cong.Rec. 18940 (1970) (statement of Sen. McClellan). See also id., at 35193 (statement of Rep. Poff) (RICO 'not aimed at the isolated offender'); House Hearings, at 665. Significantly, in defining 'pattern' in a later provision of the same bill, Congress was more enlightening: 'criminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.' 18 U.S.C. Sec. 3575(e). This language may be useful in interpreting other sections of the Act. Cf. Iannelli v. United States, 420 U.S. 770, 789, 95 S.Ct. 1284, 1295, 43 L.Ed.2d 616 (1975)."

Id. Sedima thus makes clear that a RICO violation requires continuous and related racketeering acts.

In subsequent cases, courts have struggled to implement Sedima 's directive to develop a meaningful concept of pattern based on continuity plus relationship. Development of a uniform concept has been hampered by Sedima 's instruction to read limitations into the statutory definition even though the Act is to be broadly construed, see id. at 3286, by the myriad of diverse fact patterns underlying civil RICO suits, and by the abstract nature of the Court's references to continuity and relationship.

In this case, the court and the parties assumed for purposes of the court's ruling that defendants engaged in numerous racketeering acts. It is clear that when, as here, the acts are part of a common fraudulent scheme, they satisfy the relationship requirement of Sedima. See, e.g., Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir.1986). However, to establish a RICO pattern, a plaintiff must also demonstrate continuity, that is, "the threat of continuing activity." Sedima, 105 S.Ct. at 3285 n. 14. This element is derived from RICO's legislative history, which indicates that RICO does...