Petition for Writ of Certiorari — Kehr Packages, Inc. v. Fidelcor, Inc.

99-1643

/ Suprame Court, U.S.

FILED

No.

| APR 25 1991

IN THE

|

SUPREME COURT OF THE UNITED SRRRS mo

October Term, 1990

KEHR PACKAGES, INC.

JAMES MCMURTRIE

CHARLES MCMURTRIE

EMILY MCMURTRIE,

Petitioners,

v.

FIDELCOR, INC.

FIDELITY BANK, N.A.

THOMAS DONNELLY

NEIL COHEN

JAMES NOON

MARIO GIANNINI,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE THIRD CIRCUIT

JOEL HARVEY SLOMSKY, ESQUIRE

1600 Market Street

Suite 1720

Philadelphia, Pennsylvania 19103

(215) 568-3700

PACKARD PRESS / LEGAL DIVISION, 1617 JFK BOULEVARD, PHILA, PA 19103 (215) 563-9000

QUESTIONS PRESENTED

1. May a bank, its separate departments, and its parent

holding companies, all of which played a role in furtherance of

some aspect of criminal activity, be associated in fact to form a

RICO “enterprise” under 18 U.S.C. Section 1961(4)?

2. Is a (19) nineteen month period in which respondents

engaged in a series of mail fraud offenses, with the threat of

future criminal activity present from the time of the occurrence

of the first acts, a sufficient period of time to comprise either

closed or open-ended conduct forming a pattern of racketeering

activity under 18 U.S.C. Sections 1961(1) and (5)?

PARTIES TO THE PROCEEDING

The names of the parties appearing in the caption of the

case were parties to the proceeding in the United States Court

of Appeals For The Third Circuit and the United States District

Court For The Eastern District of Pennsylvania.

TABLE OF CONTENTS

Page

CURES RULES RUNMUEURUBED 0h oe cenccccesccccetecces i

PARTIES TO THE PROCEEDING .................. i

i TTT TTT TT TET RTT ET TTT OTC Te 1

PEE 4 65.6450.506554055005040406 60084008 2

STATUTORY PROVISIONS INVOLVED .............. 2

SUPUREEOEEE CO BU GAMMBe ccncaccccaccecacssenecs 2

REASONS FOR GRANTING WRIT................06. 6

1. The Court Of Appeals For The Third Circuit Has

Rendered A Decision On The Components Of A

RICO “Enterprise” In A Way That Conflicts With

The Decisions Of Other Courts Of Appeals......... 6

2. The Court Of Appeals For The Third Circuit Has

Interpreted The RICO “Pattern” And Its Constituent

Element Of Continuity In A Way That Conflicts With

This Court’s Decision In H.J. Inc. v. Northwestern

Bell Telephone Company, 492 U.S. 299 (1989). ..... 11

CAINE 5 ncccnnsnkheeeecees s4eeabhenaaeeene 16

ii

TABLE OF AUTHORITIES

Cases: Page

Atlas Pile Driving Co. v. DiCon Financial Co., 886 F.2d

i a cons eceus ban censetees 8

Atkinson v. Anadarko Bank and Trust Co., 808 F.2d 438

eee ke cea ab bkebenneeeeasee 7,8

B.F. Hirsh, Inc. v. Enright Refining Co., 751 F.2d 628 (3d

Te eee ees kenge hehe sch esen ses 7

Banks v. Wolk, 918 F.2d 418 (3d Cir. 1990)............. 6,12

Bennett v. Berg, 685 F.2d 1053 (8th Cir. 1982).......... 6

Bennett v. United States Trust Co., 770 F.2d 308 (2d Cir.

eee ie ee eon 4h ebbnsessevasee 6,7

Bishop v. Corbitt Marine Ways, Inc., 802 F.2d 122 (5th

eee ees cebas cba detensneccse 6

Garbade v. Great Divide Mining and Milling Corp., 831

F.2d 212 (10th Cir. 1987)..........ceceecceeceeess 6

H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S.

229, 106 L.Ed.2d 295 (1989)............... 11,12,15,16

Haroco, Inc. v. American National Bank and Trust Com-

pany, 747 F.2d 384 (7th Cir. 1984) ..............0. 7

Marshall-Silver Construction Co., Inc. v. Mendel, 894

Nee ee eh Gace e ed eecenes 12

Masi v. Ford City Bank and Trust Co., 772 F.2d 793 (7th

EE ee 6

Montesano v. Seafirst Commercial Corp., 818 F.2d 423

Cee ce coed cksecver eee 8

Morrow v. Black, 742 F.Supp. 1199 (E.D.N.Y. 1990) .... 14

NCNB Nat. Bank of North Carolina v. Tiller, 814 F.2d 931

a cue ecuneeeeeescace 7

Odishelidze v. Aetna Life and Casualty Co., 853 F.2d 21

Nee ee eae da 6 kateb encecanes 6

TABLE OF AUTHORITIES — (Continued)

Cases: Page

Pereira v. United States, 347 U.S. 1 (1954) ............. 14

Schmuck v. United States, 489 U.S. 705 (1989) .......... 14

Schreiber Distributing Co. v. Serv-Well Furniture Co.,

806 F.2d 1903 (Oth Cir. 1006)... . ccc cccccccccesss 6

Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162 (3d

Gi MPA ch Garand canes saeads sebeLeekekedKeus 9,10

United States v. Computer Science Corp., 689 F.2d 1181

I ee ce wandl 6,7

United States v. Comyns, 248 U.S. 349 (1919)........... 13

United States v. Herr, 338 F.2d 607 (7th Cir. 1964)...... 13

United States v. Turkette, 452 U.S. 576 (1981) .......... 7,8

Yellow Bus Lines, Inc. v. Local Union 639, 883 F.2d 132

GN ED 66.46.65 nbG0K66dd beds KSA CERSAS Ere 6,9

Statutes:

Federal Rule of Civil Procedure 12(b)(6)................ 3

ee By eae ID, Ts 0 6 coe cacancccsccsanes 6

Te i, Wes TE PII hes dccdcccccasvencacges 7,10

See By is IE I on 6 vn kcacccnckncusnancss 2

Taleo WR, UB. Gomis Be 6 once cccanccncacnccccs 3,4,6

iv

No.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1990

KEHR PACKAGES, INC.

JAMES MCMURTRIE

CHARLES MCMURTRIE

EMILY MCMURTRIE,

Petitioners,

v.

FIDELCOR, INC.

FIDELITY BANK, N.A.

THOMAS DONNELLY

NEIL COHEN

JAMES NOON

MARIO GIANNINI,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE THIRD CIRCUIT

OPINIONS BELOW

The Opinion of the United States Court of Appeals for the

Third Circuit (A1-A40) is officially reported at 926 F.2d 1406.

The Memorandum of the United States District Court is not

officially reported.

2

JURISDICTION

The Judgment of the Court of Appeals was filed on March

6, 1991. A Petition for Rehearing was denied on March 27, 1991.

The jurisdiction of this Court is invoked pursuant to 28 U.S.C.

Section 1254(1).

STATUTORY PROVISIONS {NVOLVED

Title 18, United States Code, Section 1961(4) provides:

“(4) ‘enterprise’ includes any individual, partnership,

corporation, association, or other legal entity, and any

union or group of individuals associated in fact although not

a legal entity;”

Title 18, United States Code, Section 1961(5) provides:

“(5) ‘pattern of racketeering activity’ requires at least

two acts of racketeering activity, one of which occurred

after the effective date of this chapter and the last of which

occurred within ten years (excluding any period of impris-

onment) after the commission of a prior act of racketeering

activity;”

STATEMENT OF THE CASE

Petitioners Kehr Packages, Inc. (“Kehr”), James McMur-

trie, Charles McMurtrie and Emily McMurtrie filed suit in

August, 1989, against Fidelcor, Inc., Fidelity Bank, N.A. (“Fi-

delity”), Thomas Donnelly, Neil Cohen, James Noon, and Mario

Giannini. The Complaint contained both RICO and pendent

state law claims arising from a fraudulent promise to lend money

to Kehr. The substantive grounds for the RICO claims were

allegations of mail fraud in violation of 18 U.S.C. Section 1341.

The United States District Court for the Eastern District of

Pennsylvania dismissed Petitioners’ Complaint for lack of sub-

ject matter jurisdiction, to wit, the RICO factual claims were not

sufficiently alleged (A42).! For the same reason, the District

1. Petitioner has filed a separate Appendix in this appeal.

3

Court also denied Petitioners’ motion for leave to file an

amended complaint, which had attached a proposed amended

complaint (A48-A71).

Petitioners appealed the dismissal of the Complaint to the

United States Court of Appeals for the Third Circuit. On March

6, 1991, the Third Circuit affirmed the dismissal of the Com-

plaint. The Court of Appeals held first that for appellate

purposes the Order dated May 14, 1990 of the District Court

must be treated as a dismissal pursuant to Rule 12(b)(6), F.R.

Civ. P.,2 and therefore all factual allegations in the amended

Complaint and all reasonable inferences that can be drawn from

them must be treated as true.®

On the merits, the Court of Appeals held that a “pattern”

was not sufficiently alleged in the complaint because the ele-

ment of “continuity” was not satisfied. Viewing the scheme as

open-ended, there was no threat of future criminal activity.

Even viewing the scheme as closed-ended, the Court found that

because Respondent Donnelly’s conduct did not constitute mail

fraud, the remaining illegal activity alleged did not occur over a

long enough period to constitute continuous long-term fraudu-

lent activity posing a threat of additional repeated criminal

conduct.

In addition, the Court of- Appeals dismissed Petitioners’

claim against Fidelity under 18 U.S.C. Section 1962(c) for

another reason.* Under this Section, courts have held that an

2. F.R. Civ. P. 12(b)(6) allows a respondent to file a motion to dismiss a

complaint for failure to state a claim upon which relief can be granted.

3. In the amended Complaint, Petitioners dropped Fidelcor, Inc. and

Mario Giannini, Esquire, counsel to the bank, as defendants because after

limited discovery the cause of action against them could not be supported in

good faith. Moreover, the RICO claim was changed from being alleged

generally in one count to being alleged in four counts as violations of 1962(a),

(b), (c) and (d),\respectively. The Court of Appeals held, inter alia, that the

dismissal by the District Court of the claims under 1962(a) and (b) was

appropriate. Disagreement between the majority and dissent in the Court of

Appeals arose over the dismissal of the 1962(c) and (d) claims. Petitioners seek

reinstatement of the 1962(c) and (d) claims through the instant Petition, which

are alleged in Counts III and IV of the proposed amended Complaint

(A60-A62).

4. 18 U.S.C. Section 1962(c) provides in relevant part that: “It shall be

unlawful for any person employed by or associated with any enterprise . . . to

4

entity cannot be both an “enterprise” and a “person” or defen-

dant. Because the Court of Appeals believed that Fidelity had

been named both as a defendant and enterprise, it could not be

held liable under Section 1962(c).5

Petitioners sought and were denied rehearing in the Court

of Appeals on March 27, 1991 (A41). This Petition followed.

The facts pertinent to this appeal as set forth in the

amended Complaint (A5O-A58) are as follows:

On December 12, 1986, the McMurtries entered into an

agreement to purchase Kehr. Fidelity agreed to provide

$4,165,000 in financing secured by the assets and accounts of

Kehr, and by real estate owned by Charles McMurtrie and his

wife Emily McMurtrie. The terms of the loans ranged from five

to seven years. Neil Cohen and James Noon handled this loan

package for Fidelity. At that time, Cohen was a commercial loan

officer at the bank, and Noon was a vice-president.

The original understanding of the parties was that Fidelity

would provide, as part of the total $4,165,000 loan, a credit line

of $350,000 to be used as working capital for Kehr. The eventual

loan agreement included a $600,000 line of credit to be used as

working capital, and to finance closing costs and pay off Kehr's

prior debts. However, at the settlement on December 12, James

McMurtrie discovered that this line of credit would be insuffi-

cient to fund the necessary $350,000 in working capital. During

the settlement, Cohen and Noon, on behalf of Fidelity, made an

oral commitment to lend an additional $185,000 for working

capital. Cohen and Noon knew that Kehr would operate at a

deficit during 1987, and that the working capital would be

critically important. In reliance on this commitment, the Mc-

Murtries closed the deal and began operating Kehr.

NOTES (Continued)

conduct or participate . . . in the conduct of such enterprise’s affairs through

a pattern of racketeering activity . . .”

5. In the Petition for Rehearing filed in the Third Circuit, Petitioners

pointed out that in the proposed amended Complaint Fidelity Bank, standing

alone, was not the specified “enterprise,” but had been combined with its

parent holding companies and departments to form a group that was associated

in fact as the enterprise. See paragraph 61 of amended Complaint (A58).

5

Between December, 1986 and August, 1987, Cohen and

Noon informed James McMurtrie by telephone numerous times

that the $185,000 would be available as promised. However,

Cohen and Noon had no intention of providing the money and

made such commitments in order to induce Petitioners to

complete the settlement and to insure that Respondent Fidelity

Bank would be the recipient of large monthly interest payments,

profits and collateral. Between December, 1986 and July, 1988,

Fidelity mailed Kehr invoices for the loan payments and, in

return, Kehr mailed to Fidelity the monthly check.

By August, 1987, Cohen and Noon had left Fidelity. In

September, responsibility for the Kehr loan was transferred to

Thomas Donnelly, a vice-president of Fidelity. The McMurtries

believed Donnelly was a high level management consultant who

had lending authority. In reality, he worked in Fidelity’s Asset

Recovery Group, where he was responsible for protecting and

recovering the bank’s assets. James McMurtrie repeatedly de-

manded that Fidelity furnish the additional loan as promised,

and Donnelly said that he would review the credit file and terms

and conditions of the loans to determine whether additional

funds would be advanced by Fidelity.

In addition, Donnelly told James McMurtrie that he would

commission an appraisal of Kehr’s assets, and asked McMurtrie

to draft a “plan of attack” demonstrating how Kehr’s financial

situation could be improved. According to the amended Com-

plaint, this request was part of the course of conduct of Mr.

Donnelly aimed at misleading Petitioners into believing that he

would attempt to secure additional working capital when his real

purpose was to prepare for foreclosure on the assets of the

company and the personal assets of the McMurtries. Donnelly

never intended to secure additional working capital, and in fact

had no lending authority.

In the summer of 1988, the McMurtries found a buyer for

Kehr. Fidelity apparently had the contractual right to approve

the sale, and Donnelly met with the prospective buyer on July

20, 1988. At this meeting, Donnelly announced that the Kehr

loans were in default, and also disclosed for the first time that he

worked in the Asset Recovery Group. On the same day,

6

Donnelly mailed Kehr a notice of default and confessed judg-

ment against the collateral. The buyer continued. with the

transaction, but Donnelly and Fidelity undermined the agree-

ment of sale by unreasonably delaying approval of the sale,

despite knowing that the buyer faced a specific deadline. As a

result, the buyer withdrew its offer. In September, 1988,

Donnelly ordered Kehr to cease operations and liquidate its

assets.

REASONS FOR GRANTING THE WRIT

1. The Court Of Appeals For The Third Circuit Has Rendered

A Decision On The Components Of A RICO “Enterprise” In

A Manner That Conflicts With The Decisions Of Other

Courts Of Appeals.

Under 18 U.S.C. Section 1962(c), it is unlawful for any

“person” employed by or associated with any “enterprise” to

conduct or participate in the conduct of an enterprise’s affairs

through a pattern of racketeering activity. Most Courts of

Appeals have held that the same entity cannot serve simulta-

neously as both the “person” and “enterprise” under Section

1962(c). Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1990);

Odishelidze v. Aetna Life and Casualty Co., 853 F.2d 21, 23 (1st

Cir. 1988); Bennett v. United States Trust Co., 770 F.2d 308

(2nd Cir. 1985), cert. denied 474 U.S. 1058 (1986); United States

v. Computer Science Corp., 689 F.2d 1181, 1190 (4th Cir.

1982), cert. denied 459 U.S. 1104 (1983); Bishop v. Corbitt

Marine Ways, Inc., 802 F.2d 122 (5th Cir. 1986); Masi v. Ford

City Bank and Trust Co., 779 F.2d 793 (7th Cir. 1985); Bennett

v. Berg, 685 F.2d 1053, 1061 (8th Cir. 1982), cert. denied 464

U.S. 1008 (1983); Schreiber Distributing Co. v. Serv-Well

Furniture Co., 806 F.2d 1393, 1396 (9th Cir. 1986); Garbade v.

Great Divide Mining and Milling Corp., 831 F.2d 212 (10th Cir.

1987); Yellow Bus Lines, Inc. v. Local Union 639, 883 F.2d 132,

139-140 (D.C. Cir. 1989).

6. “Person” is defined in 18 U.S.C. Section 1961(3) to include “any

individual or entity capable of holding a legal or beneficial interest in

property.”

7

The holdings of these cases rely upon the legislative history

cf RICO, which was designed to prevent the infiltration and

control of legitimate businesses by criminals, who would there-

after conduct the affairs of the business through predicate acts.

Under this circumstance, the enterprise is considered to be a

passive actor or victim and therefore is not liable for damages

flowing from the illegal operations in which it is engaged.

Bennett v. United States Trust Co., 770 F.2d 308, 315 (2nd Cir.

1985); B.F. Hirsh, Inc. v. Enright Refining Co., 751 F.2d 628,

633 (3d Cir. 1984). The logic ot these holdings does not apply in

a case such as the instant one, where the bank is an active

wrongdoer as evidenced by the conduct of its employees.

In any event, the Courts of Appeals differ over what

combination of entities or affiliated corporations may constitute

an enterprise under 18 U.S.C. Section 1961(4). At a minimum,

an enterprise must be a “continuing unit” with an “ascertainable

structure distinct from the pattern of racketeering activity.”

United States v. Turkette, 452 U.S. 576 (1981).

In Haroco, Inc. v. American National Bank and Trust

Company, 747 F.2d 384 (7th Cir. 1984), affd. on other grounds,

473 U.S. 606 (1985), the Court sustained the propriety of making

a bank a defendant and its parent corporation the enterprise.

The bank was the culpable party and conducted its racketeering

activity through the affairs of its parent corporation. As the

Seventh Circuit stated at p. 402: “. . . we think it virtually

self-evident that a subsidiary acts on behalf of, and thus conducts

the affairs of, its parent corporation . . .” (footnote omitted).

In NCNB Nat. Bank of North Carolina v. Tiller, 814 F.2d

931, 936 (4th Cir. 1987), the Fourth Circuit reached the

opposite conclusion. In that case, the Court followed its earlier

holding that a “person” is not distinct from an “enterprise” when

a corporation and its wholly owned subsidiary are involved,

citing United States v. Computer Sciences Corp., supra at

1190-1191. In the NCNB Nat. case, the only evidence in the

record as to the relationship between the parent and the

subsidiary was the fact that the former received a substantial

portion of its revenues as dividends from the latter.

In Atkinsen v. Anadarko Bank and Trust Co., 808 F.2d 438

(5th Cir. 1987), the Fifth Circuit rejected a claim by borrowers

8

that a defendant bank, its holding companies and three employ-

ees constituted an “association in fact” enterprise. To establish

an “association in fact” enterprise under 18 U.S.C. Section

1964(4), a plaintiff must show “evidence of an ongoing organi-

zation, formal or informal, and . . . evidence that the various

__ associates function as a continuing unit.\ United States v.

Turkette, supra. In Atkinson, the Fifth Circuit noted at p. 441:

“The record here contains no evidence that the bank,

its holding company, and the three employees were asso-

ciated in any manner apart from the activities of the bank.

Plaintiffs wholly failed to establish the existence of any

entity separate and apart from the bank. In this case, the

alleged racketeering activity forming the predicate of the

RICO charges was mail fraud—the mailing of false state-

ments requesting payment of interest in excess of the

agreed amount. The mailing of loan statements was an

activity of the bank. There is no evidence of any other

activity on the part of the alleged enterprise.

In addition, there was no evidence presented that the

five associates functioned as a continuing unit or formed an

ongoing association. No connection was shown between the

three individuals and the holding company. The only fact

implicating the holding company in the alleged association

was its purchase of shares of plaintiffs’ notes from the bank.

Reasonable jurors could not have found the existence of an

enterprise separate and apart from the bank. The district

court correctly set aside the jury’s finding of a RICO

violation.”

See also Montesano v. Seafirst Commercial Corp., 818 F.2d

423, 427 (5th Cir. 1987).

In two other Courts of Appeals cases, an “association in

fact” enterprise was upheld in circumstances similar to the

instant case. In Atlas Pile Driving Co. v. DiCon Financial Co.,

886 F.2d 986, 995-996 (8th Cir. 1989), a mortgage lender and its

affliated real estate development corporation were sued as

persons conducting an “association in fact” enterprise composed

9

of themselves and other related entities involved in the con-

struction and sale of two residential housing projects. Subcon-

structors sued the mortgage lender for participating in a scheme

to defraud them of payment for their materials and labor. The

Court held that the enterprise alleged had an existence apart

from the members of which it was comprised and was a valid

collective entity. Corporations may be considered associations in

fact for purposes of RICO. See generally, Yellow Bus Lines, Inc.

v. Local Union 639, supra at 140-141.

Even the Third Circuit has upheld the validity of a combi-

nation of corporations comprising an association in fact enter-

prise. In Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162 (3d

Cir. 1989), Shearin alleged that she was hired by Hutton Trust

as an officer and Trust Counsel. Hutton Trust and Hutton, Inc.

were wholly owned subsidiaries of Hutton Group. 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. Each defendant entity received

funds from the scheme. Shearin alleged that she was dismissed

in order to prevent her from making disclosures about the illegal

activities.

In Shearin, defendants named in a claim under Section

1962(c) were Hutton Group and Hutton Inc. individually. This

fact alone did not lead to dismissal of this claim, since the

enterprise was a different entity. As the Third Circuit noted at

pp. 1165-1166:

“Shearin pleaded the existence of an enterprise. Para-

graph 14 of the complaint states that ‘the association of

Hutton Group, Hutton Inc., and Hutton Trust . . . was an

enterprise under 18 U.S.C. 1961(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 associ-

ated in fact although not a legal entity.’ 18 U.S.C. Sec.

1961(4). Interpretation of this term has been liberal, and

10

nothing precludes an association of corporations for illicit

purposes from constituting an enterprise. . .”

In this case the “enterprise” under Section 1961(4) is

described in paragraph 61 of the amended Complaint as follows

(A58):

“61. Fidelity Bank and the parent holding companies,

Fidelcor, Inc. and First Fidelity Bancorporation, and the

Commercial Loan Department and Asset Recovery Group,

together were all associated in fact and formed an enter-

prise as defined in 18 U.S.C. Section 1961(4).”

The Complaint alleged that Fidelcor, Inc., located in

Pennsylvania, the original parent holding company of Fidelity

Bank, merged with First Fidelity Bancorporation, located in

New Jersey. The merger occurred on February 29, 1988, in the

middle of the scheme, and created a new parent holding

company, First Fidelity Bancorporation.

The amended Complaint details the fraudulent activities of

Fidelity Bank and its employees who worked in the bank’s

Commercial Loan Department and Asset Recovery Group. In

addition, the amended Complaint described in paragraphs 47

and 48 the involvement of the parent holding companies as

follows (A56):

47. Defendant Fidelity Bank’s parent holding com-

panies, Fidelcor Inc. and First Fidelity Bancorporation,

conducted and continues to conduct an internal loan audi:

review which monitors and rates the loans of its subsidiar-

ies. The loan review group of the parent holding company

is independent of the lending units and management

structure of subsidiary Fidelity Bank.

84. As a direct result of the audit of the loan to Kehr

Packages, Inc. described herein conducted by the audit

review group of Fidelcor inc. and First Fidelity Bancorpo-

ration, credit reports were prepared which were relied

upon by some and/or all defendants in implementing the

scheme to defraud Plaintiffs.”

1]

Accordingly, the amended Complaint contains sufficient

factual averments to show that the bank, its departments and

their parent holding companies played roles in furtherance of

the fraudulent scheme. The enterprise had the characteristics of

a shared and common purpose, an ongoing organization, and its

components functioned as a continuing unit. Under these

circumstances, a valid RICO enterprise existed. Thus, the Third

Circuit erred in holding that Fidelity Bank was the RICO

enterprise and under Section 1962(c) could not be a RICO

defendant.

Given the conflict that exists in the Courts of Appeals on the

components of a RICO “enterprise,” a writ of certiorari should

be granted in order to afford Your Honorable Court the oppor-

tunity to resolve this matter.

2. The Court Of Appeals For The Third Circuit Has Inter-

preted The RICO Pattern And Its Constituent Element Of

Continuity In A Way That Conflicts With This Court’s

Decision In H.J. Inc. v. Northwestern Bell Telephone Co.,

492 U.S. 229 (1989)

Under 18 U.S.C. Section 1961(1) and (5), a “pattern of

racketeering activity’ requires the commission of at least two

predicate offenses.

In H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S.

229, 106 L.Ed.2d 195 (1989), this Court squarely rejected the

notion that this definition of pattern requires an allegation and

proof of multiple “schemes” and instead adopted a flexible

approach. It is “continuity” plus “relationship” of racketeering

activity which combines to produce a pattern. Both tests depend

heavily on the specific facts of each case.

“Continuity” of racketeering activity was described by this

Court as both a closed- and open-ended concept, referring

either to a closed period of repeated conduct, or to past conduct

which by its very nature projects into the future with a threat of

repetition.

As this Court succinctly stated in often quoted language: “A

party alleging a RICO violation may demonstrate continuity

over a closed period by proving a series of related predicates

12

extending over a substantial period of time. Predicate acts

extending over a few weeks or months and threatening no future

criminal conduct do not satisfy this requirement . . . In such

cases liability depends on whether the threat of continuity is

demonstrated.” “Long-term criminal activity can be established

either by proof that the racketeering acts themselves include a

specific threat of repetition extending indefinitely into the

future, or that the acts are part of an ongoing entity's regular way

of doing business. Long-term associations that exist for criminal

purposes can establish continuity.”

A. The Pattern Of Mail Fraud Offenses Alleged In The

Amended Complaint Satisfies The Requirements Of A

Close-Ended Scheme

In the instant case the Third Circuit has seized upon the

above language from H.J. Inc. and interpreted it in a way that

eradicates the notion that a closed period of repeated conduct

extending over a substantial period of time may constitute close-

ended continuity. The amended Complaint alleged that Respon-

dents, in carrying out their scheme, engaged in numerous acts of

mail fraud, 18 U.S.C. Section 1341, during a nineteen month

period from December, 1986 to July, 1988. This period of time

is more than adequate to establish a closed-ended continuity

occurring over a substantial period of time. As the dissent to the

Third Circuit opinion points out, closed-ended continuity is

primarily a question of duration, with the bottom line of a few

weeks or months being insufficient to establish closed-ended

continuity. See, i.e., Marshall-Silver Construction Co., Inc. v.

Mendel, 894 F.2d 593 (3d Cir. 1990) (less than seven months

insufficient) and Banks v. Wolk, 918 F.2d 418 (3d Cir. 1990)

(eight months insufficient).

Apparently recognizing that a nineteen month period

would be sufficient, the Third Circuit incorrectly reduced the

length of time of the closed-ended continuity by (10) ten months

by eliminating the time that Respondent Thomas Donnelly, an

employee of the bank, was part of the scheme. This is accom-

plished in two ways. First, by discounting Donnelly’s actions as

not being fraudulent, and second, by describing the mailings as

7 13

“innocent,” with the continuity test requiring that the focus be

on the instances of deceit in the underlying fraudulent scheme.

Insofar as Donnelly is concerned, the Third Circuit inap-

propriately considers his conduct in isolation. Donnelly’s con-

duct should be viewed in light of what Petitioners knew when

Donnelly became part of the scheme. Respondents Cohen,

Noon and Fidelity Bank initiated this fraudulent scheme

through misrepresentations which caused Petitioners to put

over four million dollars worth of assets at risk. When Donnelly

joined the scheme as a coconspirator as alleged, he continued

the misrepresentations. He said he would review the credit file

and terms and conditions of the loan and have a new appraisal

completed, all to determine whether additional funds could be

advanced as working capital. In fact, contrary to his word,

Donnelly had a “knockdown” appraisal done in order to deter-

mine the liquidation value of the assets. The amended Com-

plaint alleged that at no time did Donnelly ever intend to assist

Petitioners in obtaining additional working capital.

Under the mail fraud statute, 18 U.S.C. Section 1341, the

law has long been established that a scheme to defraud may

consist of suggestions and promises as to the future, when not

made in good faith but with deceptive intent. United States v.

Herr, 338 F.2d 607, 610 (7th Cir. 1964); United States v.

Comyns, 248 U.S. 349 (1919). \

Here, Donnelly engagéd in such conduct. He did so to lull

Petitioners into a false sense of believing that additional fi-

nancing may be available to allow the business to survive. While

Petitioners relied upon Donnelly’s false promises, ten additional

monthly payments were made on the loans containing large

amounts of interest. As part of the scheme, Donnelly’s object

was to secure this money and then at a future date to “pull the

plug” and force a liquidation. This is hardly conduct becoming a

friendly banker.”

Furthermore, the Third Circuit appears to concede that the

mailing of not only the invoices for payment but also the return

7. The deception inherent in seeking a “plan of attack” and not disclosing

that he worked in the Asset Recovery Group was all part of the scheme to

defraud.

14

check to the bank is a sufficient mailing under Section 1341.

“Innocent” mailings satisfy the mailing element and each mail-

ing incident to an essential part of the scheme constitute a new

violation. Schmuck v. United States, 489 U.S. 705, 715 (1989),

Pereira v. United States, 347 U.S. 1, 8 (1954). The Third Circuit

overlooks, however, the fact that Petitioners’ factual allegations

demonstrate that an inference can be drawn that monthly

mailings were made almost in tandem with the false represen-

tations and omissions of Noon, Cohen and Donnelly over the

nineteen month period. There was constant interplay between

the bankers and Petitioners, who have no burden of showing

that false statements were made exactly on the date of the

mailings. These mailings were intrical to the overall scheme to

enrich Respondents.* Under these circumstances the dissent in

the Third Circuit correctly notes that the mailings were not

really innocent and it confuses the analysis of what constitutes

the fraudulent scheme to consider them as “innocent.”

b. The Pattern Of Mail Fraud Offenses Alleged In The

Complaint Also Satisfies The Requirements Of An Open-

Ended Pattern

The Third Circuit also viewed the Complaint filed in this

case as not alleging facts showing a threat of racketeering activity

beyond the end of the completed scheme alleged and, as a

result, held that open-ended continuity is absent.

In reaching this conclusion, critical points inherent in the

H.J. Inc. holding are overlooked. Whether future criminal

activity is threatened should be determined by examining the

activity at the time of the occurrence, rather than through a

hindsight evaluation when the scheme is at an end. Morrow v.

Black, 742 F. Supp. 1199, 1207 (E.D.N.Y. 1990). “That racke-

teering activity lasts-in actuality only a few weeks and then is

8. As to Respondents Donnelly and Fidelity Bank, additional mailings

were alleged, including the mailing of two letters in regard to payment of

principal and interest and a “Notice of Default” and confessed judgments

against the properties pledged as collateral for the loans (A56).

15

ceased because the participants are found out would not neces-

sarily mean that at the time the activity took place, it had not

threatened future criminal activity.” Id. at 1207.

Here, if Petitioners had uncovered the scheme after ten or

twelve months and then filed suit under RICO, it could be

alleged in the complaint that future misrepresentations by the

bankers and continued mailings of the invoices and payments

would constitute the threat of future criminal activity. The same

allegation is true had the scheme been uncovered at or near the

time of settlement on the loan when the initial outright misrep-

resentations were made.

The fact is that by the Third Circuit misapplying the

precepts of H.J. Inc., the wrongdoers — Respondents — are being

rewarded for allegedly ending the scheme on July 20, 1988 when

Donnelly announced that he worked in the Asset Recovery

Group and declared the loans in default. These facts ended the

scheme only in the context of viewing it as closed-ended. But

these facts do not diminish the magnitude of the past conduct in

this case which by its nature projected into the future with the

threat of repetition. This conduct is sufficient to establish

“continuity” under the H.J. Inc. test, supra.

Whether the fraudulent scheme alleged in the amended

Complaint is considered to be close-ended over an eight, ten or

nineteen month period, it is still sufficient to meet the require-

ments of continuity. The same is true if the illegal scheme is

viewed as open-ended. Under these circumstances, it is appar-

ent that the clues set forth in H.J. Inc. are inadequate to foster

a meaningful concept of pattern among the lower federal courts.

Further clarification is needed to afford them guidance in

determining what acts constitute a RICO pattern.

In summary, this case amply demonstrates what the Hon-

orable Antonin Scalia noted in his dissent in H.J. Inc. — “that at

least a few months of racketeering activity (and who know how

9. Needless to say, the effects of the scheme continue to date. As alleged

in paragraph 56 of the amended Complaint, Respondents have seized personal

bank accounts and assets of Petitioners; have executed and attempted to

execute judgments on the real estate of Charles and Emily McMurtrie; have

sold the real estate and machinery and equipment of Kehr Packages, Inc.;

garnished rents, and forced the McMurtries to declare bankruptcy (A58).

16

much more?) is generally for free, as far as RICO is concerned.”

106 L.Ed.2d at 217.

CONCLUSION

For all of these reasons, Petitioners respectfully request

that their Petition for a Writ of Certiorari to the United States

Court of Appeals for the Third Circuit be granted.

Respectfully submitted,

v oA

JOEL HARVEY SLOMSKY, ESQUIRE

Attorney for Petitioners