Verna Emery, on Behalf of Herself and All Others Similarly Situated v. American General Finance, Incorporated

COFFEY, Circuit Judge,

dissenting.

It is a truth at least as old as the Bible that “the borrower is servant to the lender.” Proverbs 22:7. Polonius recognized this when he advised Laertes:

Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulleth th’ edge of husbandry.

Hamlet, Act I, scene iii, line 75 (Riverside Shakespeare). For whatever reason, Verna Emery did not heed this wisdom and, in the words of the majority, she ended up “over *1349 paying disastrously for credit.” Emery then brought a suit under civil RICO, claiming that American General Finance, Inc. (“AGF”) engaged in a pattern of racketeering activity, i.e., acts of “loan-flipping” that allegedly constitute mail fraud pursuant to 18 U.S.C. § 1341 . The majority concludes that it was improper for the district court to dismiss Emery’s suit on a 12(b)(6) motion. I am unable to join in this conclusion and therefore respectfully dissent.

ANALYSIS

In addressing any civil RICO claim, it is worthwhile to consider both the original purposes of the RICO statute 1 and the way in which RICO operates in tandem with other statutes:

Congress enacted RICO in an attempt to eradicate organized, long-term criminal activity. To that end, Congress chose to supplement criminal enforcement of its provisions with a civil cause of action for persons whose business or property has been injured by such criminal activity. To encourage private enforcement, Congress provided civil RICO plaintiffs with the opportunity to recover treble damages, costs, and attorney’s fees if they can successfully establish the elements of a RICO violation by a preponderance of the evidence. The elements of a RICO violation consist of ‘(1) conduct (2) of an enterprise (3) through a. pattern (4) of racketeering activity.’ A pattern of racketeering activity consists of at least two predicate acts of racketeering committed within a ten-year period. Predicate acts are acts indictable under a specified list of criminal laws, including mail fraud under 18 U.S.C. § 1341 , and wire fraud under 18 U.S.C. § 1343 .

Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1019 (7th Cir.1992) (internal citations omitted).

The elements of mail fraud under 18 U.S.C. § 1341 are: “(1) the defendant’s participation in a scheme to defraud; (2) defendant’s commission of the act with intent to defraud; and (3) use of the mails in furtherance of the fraudulent scheme.” United States v. Walker, 9 F.3d 1245, 1249 (7th Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 1863 , 128 L.Ed.2d 485 (1994). The district court, pursuant to Rule 12(b)(6), dismissed Emery’s civil RICO claim because it failed to state a claim for mail fraud. 2 The . district court was troubled by the plaintiffs failure to “identify any specific false statement of material fact allegedly made by the defendant” and concluded, in light of AGF’s compliance with state and federal consumer lending laws, that Emery could not establish a “scheme to defraud” within the meaning of 18 U.S.C. § 1341 . Emery v. American General Finance, 873 F.Supp. 1116, 1120 (N.D.Ill.1994).

*1350 The gist of Emery’s complaint is not that AGF outright lied to her; she cannot make such a claim because the flier distributed to her (quoted at length in the majority opinion) contained no false statements or affirmative misrepresentations. Rather, Emery argues that AGF omitted or failed to disclose material information (specifically, the fact that refinancing her existing loan would be more costly than obtaining a new loan). “Indeed,” as the district court observed, “plaintiffs entire ease is premised upon defendant’s failure to volunteer the fact that a second loan would be cheaper than a refinancing of the first loan.” Id.

The majority, citing United States v. Keplinger, 776 F.2d 678, 697 (7th Cir.1985), asserts that an omission or a non-disclosure can sometimes amount to fraud within the meaning of the mail fraud statute, even “without proof of a duty to disclose the information pursuant to a specific statute or regulation.” Maj.Op. at 1347. In Keplinger , this court borrowed language evidently first used by the Fifth Circuit stating that “the measure of fraud is its departure from moral uprightness, fundamental honesty, fair play and candid dealings in the general life of members of society.” 776 F.2d at 698 ; see Gregory v. United States, 253 F.2d 104, 109 (5th Cir.1958). However, subsequent to our decision in Keplinger , this court “repented” of our earlier infatuation with such broad language, calling it “hyperbole.” Matter of EDC, Inc., 930 F.2d 1275, 1281 (7th Cir.1991). In an opinion authored by Chief Judge Posner, this court explicitly warned against “extravagant rhetoric ... interpreting the federal mail fraud ... statute[ ].” Id. (emphasis added). “Read literally,” we cautioned, the “ ‘fair play 5 theory of mail and wire fraud” would “put federal judges in the business of creating new crimes; federal criminal law would be the nation’s moral vanguard.” Id. (emphasis added); see also United States v. Holzer, 816 F.2d 304, 309 (7th Cir.1987), cert. granted and judgment vacated on other grounds, 484 U.S. 807 , 108 S.Ct. 53 , 98 L.Ed.2d 18 (1987) (‘moral uprightness’ standard “is much too broad” and “cannot ... be taken literally.”). Our cases thus make clear that the mail fraud statute does not codify a strict code of honor in business dealings, but rather targets only conduct that is widely recognized as fraudulent. See Holzer, 816 F.2d at 309 ; United States v. Dial, 757 F.2d 163, 170 (7th Cir.1985), ce rt. denied, 474 U.S. 838 , 106 S.Ct. 116 , 88 L.Ed.2d 95 (1985).

Since Keplinger , this court has also clarified that “mere failure to disclose, absent something more,” does not constitute mail fraud, notwithstanding the broad language used in Keplinger and a handful of other cases. Reynolds v. East Dyer Development Co., 882 F.2d 1249, 1252 (7th Cir.1989) (emphasis added). The cases in which this court has held that “non-disclosure” may be deemed fraudulent all involved a special circumstance of some kind. See, e.g., Dial, 757 F.2d at 170 (defendant, a fiduciary, engaged in “elaborate efforts at concealment”); Holzer, 816 F.2d at 309 (defendant, a public official, engaged in “systematic” receipt of bribes “coupled with active efforts [at concealment]”); Keplinger, 776 F.2d at 699 (omission could properly be considered part of a scheme to defraud where defendant engaged in “a wide variety of deceptive actions”).

There were no such special circumstances in this ease. AGF, as Emery’s creditor, was not a fiduciary. See McErlean v. Union Nat’lBank of Chicago, 90 Ill.App.3d 1141 , 46 Ill.Dec. 406, 412 , 414 N.E.2d 128, 134 (1980). AGF did not engage in a “wide variety of deceptive actions,” nor can its conduct vis-á-vis Emery be fairly described as an “elaborate attempt at concealment.”

Defeating all of the potential arguments available to Emery is a simple and uncontro-verted fact: AGF fully complied with the disclosure requirements of both the federal Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., and the Illinois Consumer Installment Loan Act (“CILA”), 205 ILCS 670/1 et seq. Before Emery agreed to refinance her loan, AGF disclosed to her the following information, as required by law: (1) the exact amount necessary to pay off the existing loan, (2) the amount financed, (3) the finance charge, (4) the annual percentage rate, (5) the total of payments, and (6) the amount of the monthly payments.

*1351 My colleagues do not think that AGF’s compliance with these statutes is especially significant. The majority calculates that the implicit interest rate paid by Emery for a loan of just $200 exceeded 110 percent per annum and notes that TILA does not require disclosure of this fact because the Act treats the transaction as reborrowing the original amount of the loan plus $200. “So much for the Truth in Lending Act as a protection for borrowers,” the majority editorializes. The consumer lending statutes passed by Congress and by the Illinois legislature may well be inadequate for failing to require explicit disclosure of the disadvantages of refinancing versus taking out a new loan. 3 If this is true, however, any remedy lies with Congress or with the state legislature, not with a federal court. “It is the duty of the legislative branch to make the law” and we, as federal appellate judges, should “refuse[ ] to infringe on the legislative prerogative of enacting statutes to implement public policy.” Welsh v. Boy Scouts of America, 993 F.2d 1267, 1270 (7th Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 602 , 126 L.Ed.2d 567 (1993) (quotation omitted). As Justice Cardozo once observed: “We do not pause to consider whether a statute differently conceived and framed would yield results more consonant with fairness and reason. We take the statute as we find it.” Anderson v. Wilson, 289 U.S. 20, 27 , 53 S.Ct. 417, 420 , 77 L.Ed. 1004 (1933).

In addition to criticizing TILA, the majority also makes much of the “financial naiveté of working-class borrowers.” Emery, we are told, belongs to a “class of probably gullible customers for credit.” Lack of financial acumen, according to the majority, is much like blindness or mental retardation because it renders one vulnerable to “con men and defrauders.” 4 By enacting TILA, however, Congress has provided all the protection it deems appropriate for borrowers, be they financially astute or ill-informed and gullible. Moreover, notwithstanding the majority’s eri-tique of TILA, the legislation does offer extensive protection to borrowers by requiring disclosures that are easy to comprehend “so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” 15 U.S.C. § 1601 (a). It appears from the record before us that Verna Emery is a fully capable adult citizen suffering from no physical or mental disabilities, such as blindness, deafness, or mental incapacity. I am therefore unable to see the relevance of her susceptibility to business practices which, although arguably manipulative and unethical, fully complied with the law.

I do not condone AGF’s practices, nor am I unsympathetic to Emery’s plight. The conduct in the factual record before us may very well have been improper, but it violated neither statute nor case law. As a distinguished colleague on the Ninth Circuit once observed, “courts do not sit to compensate the luckless; this is not Sherwood Forest.” Kern v. Levolor Lorentzen, 899 F.2d 772, 798 (9th Cir.1990) (Kozinski, J., dissenting). I must insist, as this court has in the past, that “[n]ot all conduct that strikes a court as sharp dealing or unethical conduct is a ‘scheme or artifice to defraud’” within the meaning of the federal mail fraud statute. Reynolds, 882 F.2d at 1252 ; see also Dial, 757 F.2d at 170 .

Emery offers a broad definition of what constitutes fraudulent conduct. Under this definition, which the majority appears to accept, any number of “half-truths” and omissions that lead people to part with their hard-earned cash could be prosecuted under the federal mail fraud statute, even when no special circumstances accompany the alleged non-disclosure. This definition of fraud potentially encompasses a vast range of questionable activity. To use an example cited at oral argument, it would criminalize numerous direct-mail solicitations informing recipients that they have “won the lottery,” or that a *1352 “special cash prize” is reserved for them. 5 Partly because the “use of the mails” requirement is so easily met, this court has (in the past) eschewed sweeping interpretations of what constitutes fraudulent conduct under the mail fraud statute. Holzer, 816 F.2d at 309 . This conservative approach guarantees that “federal judges [will not be] in the business of creating what in effect would be common law crimes, i.e., crimes not defined by statute.” Id.

CONCLUSION

I am somewhat heartened by the limited nature of the majority’s holding. Wisely, my colleagues refuse to hold that “loan-flipping” is fraud, or that AGF engaged in fraud in this ease. The majority also denies any intention to “eriminalizef ] sleazy sales tactics, which abound in a free commercial society.” Maj.Op. at 1348. Nevertheless, the majority does hold that it was premature for the district court to dismiss the suit. I disagree. In light of AGF’s compliance with TILA and the Illinois consumer lending statute, I do not believe that Emery will ever be able to establish a “scheme or artifice to defraud,” much less “an elaborate attempt at concealment.” AGF’s full compliance with the applicable disclosure requirements, and the absence of any special circumstance that would render AGF’s non-disclosure fraudulent, bar any possible claim under the mail fraud statute, and thus, under RICO. The district court’s dismissal of Emery’s lawsuit under 12(b)(6) was proper because it appeared that Emery could “prove no set of facts in support of [her] claim which would entitle [her] to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 , 78 S.Ct. 99, 102 , 2 L.Ed.2d 80 (1957) (interpreting Rule 12(b)(6)). Remanding the case for further proceedings at this juncture is, in my opinion, both unnecessary and a waste of judicial resources. The majority’s holding sends the wrong message to district judges, who are trying desperately to manage their dockets in the face of mounting civil litigation, and will only encourage further lawsuits based on novel and expansive readings of the mail fraud statute and of RICO. For these reasons, I respectfully dissent from the majority.

. X am well aware that we have strayed a good distance from the original intent behind the RICO statute, which was to combat organized crime, and that the Supreme Court has to some extent validated this trend. See, e.g. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 , 105 S.Ct. 3275 , 87 L.Ed.2d 346 (1985) (RICO applies to legitimate businesses); National Organization for Women v. Scheidler, — U.S. -, 114 S.Ct. 798 , 127 L.Ed.2d 99 (1994) (RICO does not require proof of an economic motive). Nevertheless, the Supreme Court has also made it clear that RICO’s "liberal construction” clause (see note following 18 U.S.C. § 1961 ) is not a blank check for those who wish to advance novel interpretations of the statute. Reves v. Ernst & Young, 507 U.S. 170 , 113 S.Ct. 1163, 1172 , 122 L.Ed.2d 525 (1993). I believe it is important to resist further expansion of civil RICO through liberal interpretation of either RICO itself or of the various "predicate act” statutes, such as the mail fraud statute.

. At the district court level, AGF offered additional arguments in favor of dismissal. These arguments centered on Emery’s alleged failure to establish the elements, not of mail fraud, but of RICO itself. AGF argued that (1) Emery failed to allege sufficiently that AGF, as a RICO “person,” conducted or participated in the affairs of a RICO "enterprise,” and (2) Emery failed to allege sufficiently that a RICO violation was the proximate cause of any injury. Admittedly, these arguments are complicated, and the district judge did not address them. Nevertheless, this court may affirm a dismissal on any ground supported by the record. Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 778 (7th Cir.1994). I think it is unfortunate that the majority chooses not to consider these arguments, which may have merit. As Judge Cudahy once observed, "RICO is a judge’s nightmare and doggedly persistent efforts to hammer it into a rational shape deserve the utmost respect even though they can rarely accomplish the impossible.” Id. at 785 (Cudahy, J., concurring).

. At oral argument, counsel for Emery was unable to shed light on whether Congress has been apprised of the alleged shortcomings of the TILA statute, or whether Congress has ever considered amending the statute to address the issue of "loan-flipping.”

. Emery does not allege that she is either blind or mentally retarded. In any case, persons who suffer from such disabilities generally conduct their financial affairs with assistance of some kind, often provided by a fiduciary.

. Similarly, the definition of fraud urged by Emery could extend, under the wire fraud statute, 18 U.S.C. § 1343 , to many advertisements on late-night television, which tout the benefits of telephone psychics, miracle vitamins, and the like.