Amicus Curiae Brief — American Nat. Bank & Trust Co. of Chicago v. Haroco, Inc.

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Offics-Supreme Court, US.

os FILED

CO DER 21 1004

No. 84-822 ALEXANDER L. STEVAS,

| CLERK ae

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1984

AMERICAN NATIONAL BANK AND TRUST COMPANY

OF CHICAGO, et al.,

Petitioners,

HAROCO, INC., et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Seventh Circuit

BRIEF OF THE

AMERICAN BANKERS ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF PETITION

JOHN J. GILL

General Counsel

Counsel of Record

JOHANNA M. SABOL

Associate General Counsel

MICHAEL F.. Crotty

Associate General Counsel-Litigation

American Bankers Association

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 467-4240

December 21, 1984

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

QUESTION PRESENTED FOR REVIEW

Whether the court below was correct in holding that

the plaintiff's allegations of a cause of action under the

Racketeer Influenced and Corrupt Organizations Act

were sufficient to withstand a motion to dismiss.

TABLE OF CONTENTS

Page

QUESTION PRESENTED FOR ees h

TABLE OF AUTHORITIES ....-------sseecrtttt? :

INTEREST OF AMICUS CURIAE ....----- sss 000? .

SUMMARY OF THE ARGUMENT ....--- +--+ -0 e000 :

ARGUMENT .... cc ccc ccc cecccccvcensseasess

Decisi f the U.S. Courts of A peals inter-

: preti = he civil liability sections of the Racket-

eer influenced and Corrupt Organizations Act

are irreconcilable.......-----+-+> : vous a a ae

truction of the Racketeer intiu-

. ae eT ee mae Act is an im-

portant issue of fede law which has not been ‘

decided by this Court but should be ......---- 7

CONCLUSION 2.0.0.0 ccc cece ccccegesceeseses

iii

TABLE OF AUTHORITIES

CASES: Page

Alcorn County v. U.S. Intersate Supplies, Inc., 731

F.2d 1160 (5th Cir. 1984) .................. 5

Bache Halsey Stuart Shields, Inc. v. Tracy Collins

Bank & Trust Co., 558 F. Supp. 1042 (D. Utah

ce cc cence x

Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.

Cee ecccee 2,5, 10, 11

Bunker Ramo Corp. v. United Business Forms, Inc.,

713 F.2d 1272 (7th Cir. 1983) ............... 8

Copperweld Corporation v. Independence Tube Corp.,

104 S. Ct. 2781(1964)..................... 7

Furman v. Cirrito, 741 F.2d 524 (2d Cir. 1984)...... 5, 10

Haroco Inc. v. American National Bank & Trust Co.,

No. 83-2529 (7th Cir. 1984) ........... 5, 6, 7, 8, 11

Russello v. United States, 104 S. Ct. 296 (1983) ..... 9, 10

Sedima S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2d

cae, 5, 6, 8, 11, 12

Taylor v. Bear Stearns & Co., 572 F. Supp. 667 (N.D.

a eae 8

United States v. Computer Sciences Corp., 689 F.2d

Te ewwcueees 6

United States v. Hartley, 678 F.2d 961 (11th Cir.

Nn wc eccnc 6, 7

United States v. Turkette, 452 U.S. 576(1980)...... 9, 10

STATUTES:

Nee nuance 4

EE 4

Pub. L. No. 91-452, § 1, 84 Stat. 922(1970) ........ 10

Table of Authorities Continued

Page

MISCELLANEOUS:

Note, Prime Rate Fraud Under RICO, 72 Georgetown

ian am ee A elas cage 11

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1984

No. 84-822

AMERICAN NATIONAL BANK AND TRUST COMPANY

OF CHICAGO, et al.,

Petitioners,

Vv.

HAROCO, INC., et al,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Seventh Circuit

BRIEF OF THE

AMERICAN BANKERS ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF THE PETITION

INTEREST OF THE AMICUS CURIAE

The American Bankers Association respectfully sub-

mits this brief as amicus curiae, with the consent of the

parties, to urge that the Court grant the petition for a

writ of certiorari to review the decision of the United

States Court of Appeals for the Seventh Circuit. In that

| decision, the Court held that it was unnecessary for a

plaintiff to plead and prove any kind of special “racketeering

injury” in order to show its entitlement to treble dam-

ages under the Racketeer Influenced and Corrupt Organi-

zations Act (hereinafter “RICO”). It was sufficient for

the plaintiff to plead and prove injury arising solely from

the commission of two or more “predicate acts,” i.e.,

individual acts of racketeering activities such as the

alleged mail fraud in this case. The Court also held that

the same entity could not be both a “person” and an

“enterprise” within the meaning of the statute, but that

a parent company and its subsidiary (if they are distinct

legal entities) can fill both roles. Finally, the Court held

that the degree of specificity expected in a criminal

RICO bill of particulars is not required at the pleadings

stage in a civi! RICO case. In each respect, the Court

acted inconsistently with the reported decisions of other

United States courts.

The American Bankers Association is the principal

trade association of the commercial banking industry in

the United States. Its membership comprises approxi-

mately 90% of all American banks, and ABA member

banks are located in each of the fifty states and the

District of Columbia. This case involves a civil claim that

a commercial bank violates the Racketeer Influenced and

Corrupt Organizations Act when it lends money at an

interest rate tied to the “prime rate” while at the same

time making loans to other borrowers “below prime.”

Other commercial banks have been targets in suits with

similar allegations in at least fifteen states, located in at

least ten of the circuits. Commercial banks have also

appeared as plaintiffs in civil lawsuits charging viola-

tions of the RICO statute. See, e.g., Bankers Trust Co. v.

Rhoades, 741 F.2d 511 (2d Cir. 1984), petition for cert.

filed, 53 U.S.L.W. 3367 (U.S. Oct. 24, 1984)(No. 84-657).

As more fully appears below, there is considerable

conflict among the circuits, and among federal district

courts, over a variety of issues involved in the interpreta-

tion and application of RICO. This conflict and the

resulting confusion has a direct, immediate and serious

impact upon a large segment of our memership. As a

representative of the industry, the American Bankers

Association believes it is well positioned to describe and

discuss the issues raised in this case from a different and

unique perspective.

SUMMARY OF THE ARGUMENT

The decisions of the Seventh Circuit in this case, and

of the Second Circuit in the other civil RICO cases now

pending before the Court on petitions for writs of

certiorari present a classic case of a dispute among the

circuits for which the Supreme Court ought to grant

review under Rule 17.1(a) of the Supreme Court Rules.

The conflict among the circuits is not limited to a single

point of law, but rather to three or four distinct differ-

ences among the courts over the interpretation of the

same law. They are disputes which are irreconcilable and

which defy solution in the absence of a definitive judg-

ment from this Court. In addition, litigation under the

civil provisions of RICO is not a remote or specialized

area of the law, having little 1 elevance or interest to the

lower courts or the bar. To the contrary, there has been

a veritable explosion of civil RICO litigation in the past

few years, with a great many cases still pending before

trial or appellate courts at one stage or another. The

courts and the bar need definitive guidance on how to

resolve the many complicated issues arising from such

litigation. While the Supreme Court has rendered deci-

sions on the criminal aspects of the law, it has not yet

had occasion to deal with the civil provisions of RICO.

The issues raised by this case are thus important issues

of federal law which ought to be settled by the Supreme

Court under Rule 17.1(c) of the Supreme Court Rules.

ARGUMENT

Decisions of the U.S. Courts of Appeals interpreting

the civil liability sections of the Racketeer Influenced

and Corrupt Organizations Act are irreconcilable.

The Racketeer Influenced and Corrupt Organizations

Act provides in relevant part that “[a]ny 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 re-

cover threefold the damages he sustains and the cost of

the suit, including a reasonable attorney’s fee.” (18

U.S.C. § 1964(c)(1970)) (emphasis added). Section 1962,

in turn, makes it unlawful for a person who has engaged

in a pattern of racketeering activity to take part in the

ownership, control, establishment, operation or participa-

tion in the conduct of the affairs of an enterprise engaged

in or affecting interstate commerce. “Racketeering activity”

is defined in Section 1961(1) as the commission of any of a

series of criminal acts chargeable under state law and

punishable by imprisonment for more than one year or

any act which is indictable under various federal criminal

statutes, including mail fraud and wire fraud. A “pattern”

is the commission of two such acts within ten years of

one another (18 U.S.C. § 1961(5)(1970)).

The statute immediately raises several questions of

interpretation, which have received differing answers

from the courts. First of all, how shall the words “by

reason of” be construed? A plaintiff is entitled to treble

damages if he is injured by reason of a violation of the

section of the law which prohibits a pattern of racketeering

activity, not the commission of the specific offenses

themselves which together make up the pattern since

those are prohibited elsewhere. In this case, the Seventh

Circuit has held that injury arising from the commission

of two or more of the so-called predicate acts constitutes

injury by reason of a violation of Section 1962, and that

there is no need for the plaintiff to establish some sort of

injury above and beyond the injury attributable solely to

the commission of the predicate acts. Haroco Inc. v.

American National Bank & Trust Co., No. 83-2529, slip

op. at 17 (7th Cir. Oct. 19, 1984). In this determination,

the Seventh Circuit expressed its substantial agreement

with the Fifth Circuit (Alcorn County v. U.S. Interstate

Supplies, Inc., 731 F.2d 1160, 1169 (5th Cir. 1984)), and

its disagreement with the conclusions of the Second

Circuit in the Sedima trilogy (Sedima S.P.R.L. v. Imrex

Co., Inc., 741 F.2d 482, 494 (2d Cir. 1984), petition for cert.

filed, 53 U.S.L.W. 3367 (U.S. Oct. 22, 1984) (No. 84-648);

Bankers Trust Co. v. Rhoades, 741 F.2d 511, 516 (2d Cir.

1984), petition for cert. filed, 53 U.S.L.W. 3367 (U.S. Oct.

24, 1984) (No. 84-657); Furman v. Cirrito, 741 F.2d 524,

525 (2d Cir. 1984), petition for cert. filed, sub nom. Joel v.

Cirrito, 53 U.S.L.W. 3343 (U.S. Oct. 15, 1984) (No.

84-604). The Second Circuit, on the other hand, construes

the “by reason of” language as

a way to limit standing to sue under RICO to people

hurt by an injury of the type RICO was intended to

prevent. RICO was intended not simply to provide

additional remedies for already compensable injuries,

but rather to provide added remedies and proce-

dures to fight certain specific kinds of organized

criminality. The “by reason of” language, therefore,

requires that plaintiffs allege injury caused ~, an

activity which RICO was designed to deter, which,

whatever it may be, is different from that caused

simply by such predicate acts as are alleged here.

Sedima, 741 F.2d at 494 (footnote omitted).

A second question of interpretation is whether the

same corporation can at the same time be both a

“person” who engages in racketeering activity and the

“enterprise” controlled, owned or operated by the liable

“person.” In this case, the Seventh Circuit, agreeing

with the Fourth Circuit’s opinion in United States v.

Computer Sciences Corp., 689 F.2d 1181, 1190-91 (4th Cir.

1982), cert. denied, 459 U.S. 1105 (1983), held “that

section 1962(c) requires separate entities as the liable

person and the enterprise which has its affairs conducted

through the pattern of racketeering activity.” Haroco,

slip op. at 32. In reaching this conclusion, the court

acknowledges its disagreement with the Eleventh Cir-

cuit opinion in United States v. Hartley, 678 F.2d 961,

987-90 (11th Cir. 1982), cert. denied, 459 U.S. 1170 (1983).

The Seventh Circuit reasoned that when Congress used

the terms “employed by” and “associated with” in the

statute, it clearly contemplated that a “person” would be

separate and distinct from the “enterprise.” The Elev-

enth Circuit, on the other hand, maintained that there is

little, if any, practical difference between a corporation

and an “association” which clearly can serve in both

roles. Moreover, the Eleventh Circuit relied upon the

liberal construction clause of the statute in order to

reach its conclusion, since it thought that construction

was necessary to effectuate the objects of the law.

Congress could not have intended to allow a corporation

to escape liability under RICO by hiding behind its

corporate form where it is the central figure in a criminal

scheme. Hartley, 678 F.2d at 989.

A subsidiary question under the person/enterprise

problem is whether a corporation and its parent or

subsidiary or affiliated corporation constitute sufficiently

separate and distinct entities so that one may satisfy the

“person” requirement and the other the “enterprise”

requirement of RICO. In this case, American National

Bank is alleged to be the “person,” concucting, through a

pattern of racketeering activity, the affairs of its parent

corporation, Heller International. The Seventh Circuit

held that “[tJhat is a good allegation under section

1962(c).” Haroco, slip op. at 37. In so holding, the court

acknowledged a recent decision of this Court in which it

was held that a parent and a wholly owned subsidiary

are incapable of conspiring with one another for pur-

poses of the antitrust laws. Copperweld Corporation v.

Independence Tube Corp., 104 S.Ct. 2731, 2742 (1984).

Nevertheless, the Haroco court attempts to distinguish

away the precedent, claiming that it does not extend to °

RICO because of different premises behind RICO and

the antitrust laws.

The next question of statutory construction raised by

RICO in this case concerns the degree of specificity with

which a plaintiff must allege the commission of the

“predicate offenses.” This is a civil action for damages,

and under ordinary circumstances the liberal rules of

“notice” pleading would be applicable rather than the

more stringent requirements for pleading criminal charges.

But RICO is not an ordinary civil claim. The law specifi-

cally defines the racketeering activity for which a defend-

ant may be held liable as the commission of two or more

acts chargeable or indictable under state or federal law.

One cannot very well be charged or indicted on the kind

of generalities which would be allowed in normal civil

litigation. At least two U.S. District Courts have held

that the use of this terminology in the statute requires

that the plaintiff must plead the predicate acts of

racketeering with enough specificity to show that there

is probable cause to believe the crimes were committed.

Bache Halsey Stuart Shields, Inc. v. Tracy Collins Bank &

Trust Co., 558 F. Supp. 1042, 1045 (D. Utah 1983); Taylor

v. Bear Stearns & Co., 572 F. Supp. 667, 682-83 (N.D. Ga.

1983). Nevertheless, the Seventh Circuit rejected this

reasoning as impractical in the case below. Haroco, slip

op. at 40. A civil plaintiff, at the time of the filing of the

complaint, prior to discovery, does not have available to

him the same amount of evidence and information nor-

mally available to a grand jury before it returns an

indictment in a criminal case, and a mere complaint, no

matter how specifically pleaded, cannot very well estab-

lish “probable cause.”

A subsidiary question arising under the specificity

problem is whether or not the plaintiff in ¢ civil RICO

action must plead and prove prior convictions for the

predicate offenses. The Second Circuit so held in Sedima,

741 F.2d at 496. The Seventh Circuit has previously held

that prior criminal convictions for underlying offenses is

not a prerequisite for a civil RICO action. Bunker Ramo

Corp. v. United Business Forms, Inc., 713 F.2d 1272,

1286-87 (7th Cir. 1983). In Haroco, the court states that

“[t]he issue is not presented in this appeal.” Slip op. at

18, n. 12. Nevertheless, the court has remanded the case

to the district court for further proceedings upon a

complaint in which prior convictions of the defendants

are not alleged. See Petition for Writ of Certiorari

A-57—A-69. In light of the Sedima decision, that possible

deficiency is certain to become an issue before the

district court. Considerations of judicial economy ought

to dictate that this issue be resolved with all the others,

since the development of a record below would not in any

way affect the resolution of such a purely legal question.

In summary of this point, it is clear that the United

States Courts of Appeals and the Federal District Courts

have divided seriously on a great number of statutory

construction issues surrounding the civil liability provi-

sions of the Racketeer Influenced and Corrupt Organiza-

tions Act. The resulting confusion demands resolution

which can only come from the United States Supreme

Court, and the petition for writ of certiorari should be

granted in order to restore order to this field of the law.

The proper construction of the Racketeer Influ-

enced and Corrupt Organizations Act is an impor-

tant issue of federal law which has not been decided

by this Court but should be.

On two occasions, this Court has addressed the crimi-

nal aspects of the Racketeer Influenced and Corrupt

Organizations Act, Russello v. United States, 104 S. Ct.

296 (1983); United States v. Turkette, 452 U.S. 576 (1980);

but has yet to address the civil aspects of the law. As

indicated in the preceding section of this brief, there are,

or may be, differences in the interpretation or applica-

tion of the statute based upon some fundamental differ-

ences between civil and criminal litigation. Consequently,

this Court’s criminal RICO decisions do not necessarily

address the issues raised in the context of this case.

Aside from the sheer volume of recent civil RICO

cases, and the impact upon the industry we represent, to

which we earlier alluded, and aside from the inconsistent

decisions among the circuits, the interpretation of the

civil provisions of RICO presents an important question

of federal law in its own right.

We respectfully submit that it is essential to arrive at

some sensible reconciliation between legislative intent

and the language used in the law where Congress has

clearly expressed a limited intent, and then painted with

a broad brush. That is the case with civil RICO.

Contenders in opposing judicial camps profess to be

relying upon the “plain meaning of the statute” in the

exegesis they have performed, Bankers Trust Co. v.

Rhoades, 741 F.2d at 517; Furman v. Cirrito, 741 F.2d at

528, and yet they reach diametrically opposed results,

neither of which seem entirely satisfactory. If those

courts, such as the Seventh Circuit here, are correct in

holding that there is no requirement of a special

“racketeering injury” above and beyond injury stem-

ming solely from the commission of the predicate offenses,

then the effect will be to federalize virtually every kind

of fraud, which is normally compensable under state

common law anyway, and to impose upor those who

have committed simple fraud the treble damages and

attorney’s fee awards called for by the statute. That

could hardly have been the intent of Congress in enacting

a law specifically aimed at “eradicating organized crime

from the social fabric.” United States v. Turkette, 452

U.S. at 585. (See also Russello v. United States, 104 S. Ct.

at 302-03; Pub. L. No. 91-452, § 1, 84 Stat. 922, 923

(1970)). The Seventh Circuit acknowledges as much:

[I]t does not seem at all likely that Congress antici-

pated the application of civil RICO to improperly

calculated interest charges by a commercial bank.

And this may or may not be an appropriate subject

for this federal statute.

Haroco, slip op. at 29.

On the other hand, if those courts, such as the Second

Circuit in the Sedima trilogy, are correct in requiring a

prior criminal conviction or an ill-defined special

racketeering injury as a prerequisite to a civil RICO

action, then the statute is entirely gutted. It has little or

no meaning or impact, even upon organized crime.

Bankers Trust Co. v. Rhoades, 741 F.2d at 522-23

(Cardamone, J., dissenting). That also could not have

been the intent of Congress. (The only cure for this may

be to develop a workable definition of “special racketeering

injury.”)

Yet if the “plain meaning of the statute” yields no work-

able answer to the issues raised by the civil RICO cases,

the legislative history proves an equally unsatisfactory

point of departure. Very nearly the only way in which the

intent of Congress, in dealing with “organized crime,”

can be carried out under this statute is for the courts to

require proof of some nexus between the defendant and

what is commonly conceived of as “organized crime” — La

Cosa Nostra, the Mafia, and so forth. However, virtu-

ally all of the courts which have considered this approach

have rejected it, and correctly so. See cases collected in

Note, Prime Rate Fraud Under RICO, 72 Georgetown

L.J. 1885, 1894 n. 71 (1984). Such a requirement would do

violence to the language of the statute, present insupera-

ble problems of definition, and create the constitutional

difficulties endemic to any type of “status crime” legislation.

Yet at the same time, the Second Circuit is entirely

correct in stating that there is nothing whatsoever in the

legislative history of RICO which indicates an intent on

the part of Congress to brand “such respected and

legitimate ‘enterprises’ as the American Express Company,

E. F. Hutton & Co., Lloyd’s of London, Bear Stearns &

Co., and Merrill Lynch ... as ‘racketeers.’” Sedima, 741

F.2d at 487.

It is beyond the scope of this brief for the American

Bankers Association to suggest where the line might be

drawn in this important and confusing matter. We

simply offer the foregoing to show that the line must be

drawn, and that at this point it is only the Supreme

Court which can draw it. The petition for writ of

certiorari should be granted in order to do so.

CONCLUSION

For all of the reasons stated herein, the American

Bankers Association as amicus curiae hereby respect-

fully urges the Court to grant the peticion.

Respectfully submitted,