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

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SS # No. 84-822

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2

IN THE

Supreme Court of the United States

OcToBER TERM, 1984

AMERICAN NATIONAL BANK AND TrRusT COMPANY

or Curcaco, et al.,

Petitioners,

Vv.

Haroco, Inc., et al.,

Respondents.

On Writ of Certiorari to the United States Court of Appeals

For the Seventh Circuit

MOTION FOR LEAVE TO FILE A BRIEF AND

BRIEF OF THE AMERICAN BANKERS ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

Joun J. GILL

General Counsel

Coumsel of Record

JoHANNA M. Sasou

Associate General Counsel

Micuaet F. Crotty

Associate General Counsel—

Of Counsel: Litigation

Epwarp F’. Mannino Attorneys for Amicus Curiae

DrtwortH, Paxson, American Bankers Association

Kauiso & Kaurrman’- 1120 Connecticut Avenue, N.W.

2600 The Fidelity Bldg. Washington, D.C. 20036

Philadelphia, Pa. 19109 (202) 467-4240

February 25, 1985

AS EE TT EE IS, 4

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

IN THE

Supreme Cowt of the United States

OctoBEeR TERM, 1984

No. 84-822

AMERICAN NATIONAL BANK AND Trust CoMPANY

or Curcaco, et al.,

Petttioners,

We

Haroco, Inc., et al.,

Respondents.

On Writ of Certiorari to the United States Court of Appeals

For the Seventh Circuit

MOTION OF THE AMERICAN BANKERS

ASSOCIATION FOR LEAVE TO FILE

A BRIEF AS AMICUS CURIAE'

IN SUPPORT OF PETITIONERS

To the Honorable, the Chief Justice of the United

States and the Associate Justices of the Supreme

Court of the United States:

The American Bankers Association respectfully

moves, pursuant to Rule 36 of the Rules of this Court,

for leave to file the attached brief as amicus curiae.

(Petitioners have consented to the

filing of this brief, and a copy

of their consent is on file in the

Clerk's Office. Respondents have

refused to consent to the filing.)

2

INTEREST OF THE AMERICAN BANKERS ASSOCIATION

The American Bankers Association (‘‘ABA’’) is

the largest national trade association of the commer-

cial banking industry in the United States. Its mem-

bership includes the vast majority of commercial

banks, holding an estimated 95% of domestic assets

of all American commercial banks. ABA member

banks are located in each of the fifty states and the

District of Columbia and include banks chartered by

the United States and those chartered by their respec-

tive states.

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

elements of the statute being satisfied). It is one of

a plethora of similar suits filed against commercial

banks in at least fifteen states. Since RICO provides

for treble damages, costs and attorneys fees, a deci-

sion by this Court which allows plaintiffs to turn an

ordinary, run-of-the-mill, business dispute into a fed-

eral ‘‘racketeering’’ case would be seriously harmful

to the industry. At the same time, commercial banks

have appeared as plaintiffs in civil cases alleging vio-

lations of RICO under circumstances where it is ap-

parent that a true pattern of racketeering activities

is involved. An unduly restrictive decision by this

Court pertaining to the scope of the RICO remedy

would likewise be harmful to the victims of the kind

of injury Congress sought to prevent by enactment

of the statute.

3

WHEREFORE, it is res

pectfully requested tha

Court grant leave to the American Bankers —

ciation to file the attached Brief as Amicus Curiae

Respectfully submitted,

Joun J. Guu

General Counsel

Counsel of Record

Jowanna M. Sasori

Associate General Counsel

Micuae. F. Crorry

Associate General Counsel-

Litigation

Attorneys for Amicus Curiae

American Bankers Association

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 467-4240

February 25, 1985

i

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.

os

TABLE OF CONTENTS

Page

TaBLE OF AUTHORITIES ......---seeeerrrtrrtrrrtttt iil

INTEREST OF THE Amicus Curiae ......-+-sss000000' 1

SuMMARY OF THE ARGUMENT ..--------sssreerrrttte 5

6

Designed To Deter ....-----+++sssrecrrrrrrttt 6

A. The ‘‘By Reason Of’ Requirement .....----- 6

B. The ‘‘Person/Enterprise’’ Problem ....---.- 14

21

iii

TABLE OF AUTHORITIES

CasEs: Page

Bache Halsey Stuart Shields Inc. v. Tracy Collins

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

MEAN N6AKSAAeasbaERedanssedbacdkees snd’ 4

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

NRE eR al eT ai eae one passim

Bennett v. Berg, 685 F.2d 1053 (8th Cir. 1982) ..... 5, 15

Bennett v. Berg, 710 F.2d 1361 (Sth Cir. 1983) (en

I Mihai heiak aided die nei waid Sei. i 19

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.

SEY We Gabe hehe sca detsiuncwansn onsen 7

Copperweld Corp. v. Independence Tube Corp., 104

DY Siti b bn ewelbudcéhiedkckeid <x 18

D&G Enterprises v. Continental Illinois National Bank,

O74 F. Supp. 263 (N.D. Ill. 1983) ............... 15

First National Bank in Plant City v. Dickinson, 396

FE RE. ET RET 10

Ginzburg v. United States, 383 U.S. 463 (1966) ..... 12

Haroco v. American National Bank & Trust Co., 747

F.2d 366 (7th Cir. 1904) ..........cccccccces passim

Harvard College v. Amory, 9 Pick. 446 (Mass. 1830). 12

B. F. Hirsch v. Enright Refining Co., Inc., Nc. 84-8087

See Uy GI TI SBS caceccccccceccccecee 15

Jacobellis v. Ohio, 378 U.S. 184 (1964) .............. 11

Kaufman v. The Chase Manhattan Bank N.A., 581 F.

SS WP GU, BOD ccccccccccccccccccccs 15

Kirschner v. Table/Tel Corp., 576 F. Supp. 234 (E.D.

A RGR a ae ea De ae ge 15

iv

Taste or AvTHORITIES continued

Page

Nelson v. National Republic Bank, [1984 Transfer

Binder] Sec. L. Rep. (CCH) 791,481 (N.D. Til.

BREED vcencccvcccccssesesscedcesesedtsesescess 15

Rae v. Union Bank, 725 F.2d 478 (9th Cir. 1984) ..... 15

Securities Industry Association v. Comptroller of the

Currency, 577 F. Supp. 252 (D.D.C. 1983) ....... 10

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

GR TED ndvvnccceteseveewraevowerscensees passim

St. Louis County National Bank v. Mercantile Trust

Co. National Association, 548 F.2d 716 (8th Cir.

BIND cnccccccccsccccescccesesvecccscesscencce 10

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

RIG (Ath Chr. 1968) 2... ccccccccccvcccccccccces 15

United States v. Turkette, 452 U.S. 576 (1980) ..... 9,15

Waste Recovery Corp. v. Mahler, 566 F. Supp. 1416

(S.D.N.Y. 1983) 2.0.0... cece cece eee erence eeees 11

Wilcox Development Co. v. First Interstate Bank of

Oregon, 590 F. Supp. 445 (D. Or. 1984) ......... 15

Willamette Savings & Loan v. Blake & Neal Finance

Company, 577 F. Supp. 1415 (D. Or. 1984) .... 11,15

Yancoski v. E. F. Hutton & Company, Inc., 581 F.

Supp. 88 (E.D. Pa. 1983) ...........eeeeee ween 15

STATUTES:

BD WES. SEED occ cccvcccccnnnsesesscsssecsdvoves 10

I Oe db ocnce edn edsenendy eetagiipthdeoses 7

| RS) Prrererrrrrrrr rrr rerry ry ct 2

18 U.S.C. $ 19G1(1) .... ccc ec eccceccceeecccevcccees 2,6

Vv

TaBLe or AUTHORITIES continued

P.

18 U.S.C. § ER ee eee a.

IS US.C.$1962............. y 14

18 U.S.C. § 6

LeeisLatrve MaTeriALs:

S. Rep. No. 617, 91st Cong., lst Sess. (1960) ......... 9

MISCELLANEOUS:

G. Fischer, The Prime: Myth and Reality (1982) 3

McClellan, The Organized Crime Act, (8.30) or its

al ; me Act, (8.30) tt

Critics: Which Threatens Civil I; co? 46

Notre Dame Law. 55 (1970) — eration - 9

IN THE

Supreme Court of the United States

OcToBER TERM, 1984

No. 84-822

AMERICAN NATIONAL BANK AND TrRUsT COMPANY

or CHIcaco, et al.,

Petitioners,

v.

Haroco, Inc., e¢ al.,

Respondents.

On 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 PETITIONERS

INTEREST OF THE AMICUS CURIAE

The American Bankers Association respectfully

submits this brief as amicus curiae, to urge the Court

to so construe the Racketeer Influenced and Corrupt

Organizations Act as to preserve its remedial provi-

sions for victims of true racketeering activities, while

not permitting use of the law beyond the manifest in-

tent of Congress. The case at hand, involving a mem-

ber bank of the American Bankers Association, is an

unfortunately typical example of a case in which

2

plaintiffs seek to recover treble damages, costs and

attorneys fees for actions of the bank which Congress

never intended to prohibit by its enactment of RICO.

Even while upholding the claim in this case, the

Seventh Circuit acknowledged as much:

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

anticipated the application of civil RICO to im-

properly calculated interest charges by a commer-

cial bank, And this may or may not be an appro-

priate subject for this federal statute.

Haroco v. American National Bank & Trust Co., T47

F.2d 384, 399 (1984).

Even though it seems unlikely and may be inappro-

priate for interest ealculations to be subject to litiga-

tion under RICO, the fact of the matter is that ABA

member banks have been named defendants in cases

similar to this one in at least fifteen states. As here,

the claims typically allege that the defendant com-

mercial bank has loaned money to the plaintiffs at an

interest rate tied to the ‘‘prime rate,’’ that ‘*prime

rate” is the lowest rate available to the bank’s most

creditworthy customers, that the bank has made loans

to other customers at an interest rate lower than the

published ‘‘prime rate,’’ thus making the published

‘‘prime rate” false and fraudulent. It is further al-

leged in the typical case that the bank furthered the

‘‘fraudulent” scheme by using the United States mails

on two or more occasions to send billing statements to

the plaintiffs. This, then, is claimed to constitute ‘‘mail

fraud” within the meaning of 18 U.S.C. § 1341 and the

necessary predicate acts for ‘‘racketeering activity”’

under 18 U.S.C. § 1961(1).

3

The concept of a “prime rate”’ is consi

complicated than the simplistic copiidtin of it

which RICO Plaintiffs seem to exhibit ;* it is standard

banking practice in modern times to tie the interest

rate actually charged to a particular customer to a

a rate’’; and it is not unusual—or fraudulent—

7 charge certain customers an interest rate less than

e announced “‘prime rate’’ where other terms and

prey ans of a particular loan sufficiently distinguish

loan from the type of loan for which the ‘‘prime

rate”’ 1s set.* It simply belies common sense and cor-

rupts the language to maintain that reasonably normal

banking practice constitutes ‘racketeering activity.’’

The simple solution to the pri

prime rate/RICO prob-

lem would be for us to urge this Court to phe the

‘ , ;

See G. Fischer, The Prime: Myth and Reality, 93-105 (1982).

s In this case, by way of example, the bank is alleged to defix

Baas = as ‘‘ [t]he rate of interest charged by the bank > its

pe nth — creditworthy commercial borrowers for 90-day

oe tr loans. (Complaint, J 14). If the ‘*prime

pan le ¢c ar time happened to be 12%, a secured loan

pre 0 . & sia-month loan made at 11.5%, or a non-commer-

prime.’’ They dears oe etd hemi

rates for the particular class to which ha eneee ‘whaliy

on to the appropriate rate or rates for 9 ge

oans—such as 90-day unsecured commercial loans.

4

conclusion can be justified by the plain words of the

statute, as the Second Circuit does, that conclusion

would render the statute virtually meaningless and

deprive victims of true racketeering activity of the

protections and remedies Congress intended for them.

A good example of this problem is Bankers Trust Co.

vy. 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) in which the defendants are alleged to have

committed bankruptcy fraud, perjury, and bribery of

a state court judge—certainly not run-of-the-mill busi-

ness practices in any event. As dissenting Judge

Cardamone stated, “‘[i]f civil RICO does not provide

a remedy on the facts of this totally outrageous case,

it never will.’”? Bankers Trust Co. v. Rhoades, 741 F.2d

at 518 (Cardamone, J., dissenting).

Thus, members of the banking industry have legiti-

mate interests on both sides of the issues presented

by this case. As a representative of that industry, the

American Bankers Association believes it is equipped

to suggest a dividing line between the kind of cases

RICO was intended to cover and those it was not,

based upon the construction of the words ‘‘by reason

of” appearing in the statute and by a discussion of

the need for separate entities to satisfy the ‘‘person’”’

and “enterprise” elements of the statute.’

3 There is another statutory construction issue involved in this case,

which we believe should be resolved by the Supreme Court as well,

but the focus of this brief shall be primarily upon these two problems.

The other issue is the degree of specificity with which a plaintiff

must allege a RICO violation. Some courts have held RICO plain-

tiffs to the same test of specificity as would be required for a

criminal bill of particulars. (See, ¢.9., Bache Halsey Stuart Shields

Inc. v. Tracy Collins Bank & Trust Co., 558 F. Supp. 1042, 1045

5

SUMMARY OF THE ARGUMENT

Certiorari was granted in this case i

> doubt in order to resolve an Anse tare or ait

tween the Second and Seventh Circuits over the

proper construction of the Racketeer Influenced and

orrupt Organizations Act. Neither of the two deci-

sions represent a satisfactory answer to the statuto

ae ae problems presented by the law. If the

: naa rig s reasoning is followed, far more

pany 4 permitted to be filed under the statute

ongress ever intended; if the Second Circuit’

reasoning is followed, few, if any, claims will be ‘

mitted under the statute, and Congress could not los

intended that result either. aoe

In construing the statute, the Su

consider the nature of the activity sant ey er

se to provide a cause of action, rather than the

nature of the injury resulting from alleged racketeer-

ri activities, as the lower courts have done. Concen-

ating on the activity rather than the injury, which

(D. Utah. 1983).) Here, the Se i

: , venth Circuit held ti

= (at least where a form of ‘‘fraud’’ shrub wat dey a

oo ee the requirements of Rule 9(b) of the Fed-

martha ay iv Procedure. Haroco, 747 F.2d at 404-405. We

pg a ae t . - eh ay oy test but do not agree with the court

: ; in this case. The rule requires

mba ry constituting fraud shall be stated with a

- ‘hens “thes a hr allegations as to the identity of persons

e toans were made, what rates wer- charged

- po loans, the amounts of alleged overcharges, - a forth

> - ding = allegations fail to satisfy the specificity requirements

e 9(b). See Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir

1982), on reh’g, 710 F.2d 1361 i

“), , . 8

denied, 459 U.S. 527 (1983). ee

is fully consonant with the statute, will enable =

and juries in the future to draw the necessary a

line between real RICO violations and a 1

den variety fraud which, although sg = a vowed

state common law or other state or —

does not rise to the level of a RICO violation.

ARGUMENT

Act

fluenced And Corrupt Organizations

The ee te ne Only To Those Who Suffer Injury

Caused By An Activity The Law Was Designed To Deter

A. The “By Reason Of? Requirement

The Racketeer Influenced and Corrupt age

tions Act provides in relevant part that made

son injured in his business or property by reas te

a violation of Section 1962 tg han hey wel eo es o

r in any appropria ni

pein oi fs threefold the damages he 4

tains and the cost of the suit, including a a

attorney’s fee.” (18 U.S.C. § 1964(c) (1970) ) hase

sis added). Section 1962, in turn, makes it - ar

for a person who has engaged in a pattern fy) var

teering activity to take part in the a

establishment, operation or participation in - e 7

duct of the affairs of an enterprise engage A =

affecting interstate commerce. ‘‘Racketeering vl

ity’? is defined in Section 1961(1) as the a wa

of any of a series of criminal acts chargea ‘ u =

state law and punishable by imprisonment “4 —

than one year or any act which is indictab . - =

various federal criminal statutes, including v0 a

and wire fraud. A “pattern” requires at ca e co E

mission of two such acts within ten years 0 one a

other (18 U.S.C. § 1961(5) (1970) ).

7

It is obvious from a reading of the statute’s plain

words that RICO does not prohibit, or provide a

remedy for, commission of the so-called ‘predicate

acts.’’ Mail fraud, wire fraud, state law felonies, and

so forth, are prohibited by other pre-existing sections

of federal or state law. By its own terms, RICO pro-

hibits a pattern of racketeering activity and limits the

damage remedy to those who are injured by this pat-

tern and can satisfy the other elements of the statute.

In the Second Circuit case now before this Court for

review, Judge Oakes wrote that

RICO was intended not simply to provide addi-

tional 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, there-

fore, requires that plaintiffs allege injury caused

by an activity which RICO was designed to deter,

which, whatever it may be, is different from that

aga simply by the predicate acts as are alleged

ere.

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

This construction of the words, ‘“‘by reason of,’’ is

consistent with the Supreme Court’s construction of

the same words appearing in Section 4 of the Clayton

Act, 15 U.S.C. § 15, which grants a treble damage

remedy to ‘‘[a]ny person who shall be injured in his

business or property by reason of anything forbidden

in the antitrust laws.’’ In Brunswick Corp. v. Pueblo

Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977), this Court

held that the Clayton Act remedy was designed to

recompense ‘‘injury of the type the antitrust laws

were intended to prevent.’’ Similarly in this case, the

treble damages of RICO should be available to those

8

who suffer injury of the type RICO was intended to

prevent.

In this case, however, the Seventh Circuit held that

injury arising from the commission of two or more

of the predicate acts, standing alone, constitutes injury

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

is no need for a plaintiff to plead and prove some

sort of special racketeering injury above and beyond

the injury caused by the predicate acts. Haroco, 747

F.2d at 393. In reaching that conclusion, the court

took strenuous issue with the Second Cireuit’s efforts

to define the special racketeering injury that it re-

quires plaintiffs to plead and prove. The Seventh

Circuit calls it an ‘elusive racketeering injury require-

ment’ Id. at 399, and argues that the Second Circuit’s

hypothetical examples of injuries attributable to a

pattern, but not to individual predicate acts, are ‘*in-

consistent with the rest of the opinion.’’ Id. at 397.

The Seventh Circuit’s criticism of the Second is well-

taken in this instance.

We think that both courts have focused on the wrong

aspect of the language in the statute pertaining to

injury caused by reason of a pattern of racketeering

activity. We suggest that it is not the nature of the

injury which plaintiffs either must or need not claim

to be ‘‘special’’ in any sense. In some cases, injury

stemming solely from the commission of predicate acts

should be enough to warrant recovery under RICO;

in other cases, such injuries should not be sufficient to

award treble damages. What is the more appropriate

aspect of the law to consider is rather the nature of

the activity which causes injury. We urge the Court

to hold that plaintiffs must plead and prove that the

activity involved is a ‘‘special’’ racketeering activity.

9

By this, we do not mean to suggest that plainti

must plead and prove that the defendant is —

of Some recognized organized criminal group. The type

of activities for which Congress intended to provide

recompense under RICO are those which are “‘char-

acteristic of organized crime,” whether or not actually ©

committed by organized crime figures. S. Rep. No

617, 91st Cong., Ist Sess. 34 (1969); McClellan, The

Organized Crime Act, (8.30) or its Critics: Which

Threatens Civil Liberties? 46 N

Hayne A otre Dame Law. 55,

Focusing on the nature of the activity ra

ther

on the nature of the injury would my the Bae

sion that there will be instances in which the com-

mission of two or more acts of “mail fraud”’ will

pa a compensable RICO violation where the

acts show that the mail fraud was committed in a

fashion one would expect of true racketeers, whereas

in other cases two or more acts of **mail fraud” would

nan add up to a RICO violation where the facts show

e more than a garden variety misstatement of fact

communicated through the mails in the course of

ordinary business transaction. A *

* Here again, we do not mean to excuse the commissi

. - * sas

m ordinary business transactions. A plaintiff able to Pg

— such & fraud should be entitled to recover damages for any

ad ee as a result. And, of course, such a plaintiff is en-

' to recover damages for fraud under state common law Th

—_ in this case is whether Congress intended to federalize “

a Ay forms of state common law fraud actions and to award

nga treble damages for garden variety fraud. It is im-

pina e to read hae 4 Congressional intent into a statute whose

— Purpose is “eradicating organized crime from the social

ric.’’ United States v. Turkette, 452 U.S. 576, 585 (1980)

10

. ; th the

e approach we suggest here is consistent with t

ant nr of the statute. As indicated fo

RICO does not prohibit the listed predicate oat hee

prohibits a pattern of racketeering activity. “tt

1961(5) says that a “‘ ‘pattern of racketeering ac :

ity’ requires at least two acts of racketeering weg :

(Emphasis added.) The statute does not say tha -

pattern means two acts of racketeering ; it oom no

' say that two acts of racketeering activity will a aoe

suffice; nor does it say that only acts are —,

More may be required under the facts of a —, -

ease, An analogous definitional problem with w -

the banking industry is quite familiar arises a "

McFadden Act, which limits the ability of Na a

banks to establish branches only to the extent t ve .

state-chartered bank in the same state could esta - ;

branches. The law provides (12 U.S.C. § 36(f)) tha

the term “‘branch”’ “‘shall be held to include any ..-

branch place of business . . . at which deposits are

received, or checks paid, or money lent. Several —

have arisen in which it is claimed that a — “

bank’s separate facility is a “branch” even thoug i

does not perform any of the three listed ee

E.g., St. Lowis County National Bank v. Merc r e

Trust Co. National Association, 548 F.2d 716 (8th Cir.

1976), cert. denied, 433 U.S. 909 (1977) ; Securitres

Industry Association v. Comptroller of the ao

577 F. Supp. 252 (D.D.C. 1983), appeal dockete , No.

84-5026 (D.C. Cir. Jan. 18, 1984). This Court, in con-

struing the McFadden Act, has held that the perform-

ance of the three listed functions, or any of them,

‘‘ defines the minimum content of the term branch cid aim

[I]t may include more.” First National Bank in Plant

City v. Dickinson, 396 U.S. 122, 135 (1969) (emphasis

11

supplied). So too in this case, the statutory descrip-

tion of the “pattern of racketeering activity’’ defines

the minimum content of the term. In short, if the

plaintiff is unable to plead or prove the commission o?

two predicate acts, there is no valid RICO claim. But

even if a plaintiff can plead and prove two predicate

acts, that may or may not suffice, depending upon the

facts of a particular case. The term “‘may include

more.”’

There still remains the question of how to draw a

dividing line between those cases in which proof of

the commission of two predicate acts, without more,

shall suffice to constitute a RICO violation and those

in which proof of something above and beyond the

mere predicate acts will be required.

Perhaps the judge who wrote that “ [c]ourts recog-

nize a racketeering enterprise injury when they see

it’’® came closest to the answer. This is, as the judge

acknowledged, a paraphrase of Justice Stewart’s fa-

mous comment on the problems of defining ‘‘hard core

pornography.” Jacobellis v. Ohio, 378 U.S. 184, 197

(1964) (Stewart, J., concurring). In pornography

cases, branch banking cases, negligence cases, cases

involving application of the ‘‘prudent man rule,’”’ and

in many other areas of the law, there are not firm and

fixed definitions which answer all possible questions.

In these cases, the courts impose a “‘facts and circum-

stances’’ test. In pornography cases, for example, the

test is whether the average person, applying contem-

° Willamette Savings & Loan v. Blake & Neal Finance Company,

577 F. Supp. 1415, 1430 (D. Or. 1984). See also Waste Recovery

Corp. v. Mahler, 566 F. Supp. 1416, 1468-69 (S.D.N.Y. 1983).

12

porary community standards, would find that the work,

taken as a whole, appeals to the prurient interests,

is presented in a patently offensive manner, and is

without serious literary, artistic, political or scientific

value. Miller v. California, 413 U.S. 15, 24 (1973).

(See also Ginzburg V. United States, 383 U.S. 463

(1966), in which it was held that the circumstances of

presentation of an allegedly obscene work were rele-

vant in determining whether claims of redeeming

social value were pretense or reality.) In ‘‘prudent

man’’ cases, the rule is that a trustee should conduct

himself on behalf of settlors and beneficiaries in the

manner that men of prudence, discretion and intelli-

gence manage their own affairs. Harvard College Vv.

Amory, 9 Pick. 446, 461 (Mass. 1830). RICO cases

ought not be any different. We know frorn the legis-

lative history that Congress intended there to be a

civil remedy for activities which are characteristic of

organized crime. A court, as finder of fact, or a jury,

under proper instructions, certainly ought to be able

to determine, after a trial (or on motion for summary

judgment) whether the acts alleged were actually

committed by the defendant and, if so, whether those

particular acts were of such a nature as to be char-

acteristic of organized crime—even if committed by a

defendant with no real connection to a recognized

criminal organization. We already expect fact finders

to determine how prudent men conduct themselves and

whether a particular defendant met that standard ;

it cannot be any more difficult to expect a fact finder

to determine how a gangster would conduct himself

and whether the particular defendant met that stand-

ard. We already expect fact finders to decide what

are contemporary community standards, and what is

patently offensive under those standards. It cannot be

13

any less reasonable to ask that a fact finder determi

ermin

whether a particular activity so far exceeds the aa

munity norm for doing business as to be classified as

a racketeering activity rather th i

et an as simple garden

We could not here begin to suggest all of the possible

forms of mail fraud or wire fraud which could ever

be committed, and try to classify each of them into

RICO and non-RICO categories. But perhaps one or

two examples will suffice to demonstrate the point. We

believe, for example, that the approach we suggest

could satisfy Judge Cardamone’s concern in the

Bankers Trust ease. It is, no doubt, correct to say

that there is no special racketeering “injury” in

Bankers Trust, as defined by the Second Circuit. How-

ever, we believe that a judge or a jury could well find

under the ‘‘facts of this totally outrageous case”’ that

there was a special racketeering activity involved. The

approach we suggest should also satisfy the concerns

of the Second Circuit majdrity that “such respected

and legitimate ‘enterprises’ as the American Express

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

Bear Stearnes & Co., and Merrill Lynch .. . [not be]

ms ne as ‘racketeers.’ ”” (Sedima, 741 F.2d at 482).

: ven oy a judge or a Jury were to conclude that ‘‘mail

raud’ or “‘wire fraud’’ had, in fact been technically

committed by such a company in the context of an

otherwise entirely legitimate business transaction, the

judge or jury could well find that the offenses did not

under the circumstances, rise to the level of activities

characteristic of organized crime. The result of such

a conclusion would be that the plaintiff would receive

the damages to which he would otherwise be entitled

under state common law, the federal securities laws,

14

or other bases for a cause of action. The geen

such a case, would only lose the windfall o —

damages, which Congress never intended to apres

hin oF ae wy a it tla can to Ble

le the Seventh Circuit 1

pepe ent that Congress probably igo —_

intended RICO to apply to Boga 4 Pos rye =

interest charges by a commercial bank’”’ wi yer pon

same time so construing the statute as to

legitimate eases which Congress did intend to cover.

B. The “Person/Enterprise” Problem

In tke preceding section of this brief we ——_

the need, under the statute, for a pattern . _—_

eteering activity” to have caused an injury wg

for 2 plaintiff to ~ ee oF oe ms —

the “‘pattern of rac eteering Eg aan

the elements a plaintiff must prove. e le a

i more. That something more ww a ~

per annn Recenlie n in the statute as a conta

—must cause injury to the plaintiff 8 nersanage P a

rty by reason of the defendant’s violation 0 —

1962. Section 1962, in turn, declares it unlawf a ;

such ‘‘person” to conduct or participate - — .

of an “enterprise’s’’ affairs through the pa

racketeering activity. sei ie

i i i ip between the statu ““per-

. gin rarer that provides an additional

basis for defining a special racketeering non: Me

uirement which recognizes the clear eng o

; age. yet still implements the underlying sta cA

canmualk One of the few points upon which the ae

eourts which have construed civil gor ws eo om

all agreed is that RICO requires tha

entities or individuals which interact to bring about

the plaintiff’s injury, and that the injury must be

traceable to the “‘person’s” conduct of a separate ‘‘en-

terprise’”’ through a pattern of racketeering activity.

For this reason, cases have almost universally been

dismissed where only one entity was involved. In such

cases, almost all courts have held that there must be

two actors, and that a single entity cannot be both

the statutory ‘“‘person” (amenable to a civil suit for

damages) and the statutory “enterprise”? (which can-

not be sued for damages).*

The necessity for separate entities to constitute the

‘‘person”’ and “‘enterprise” is apparent not only from

the statutory language itself, but also stems from the

legislative purpose which underlies the enactment of

RICO. As this Court and many others have noted,

“the major purpose of [RICO] is to address the in-

filtration of legitimate business by organized crime.”’

United States v. Turkette, 452 U.S. 576, 591 (1980).

*B. F. Hirsch v. Enright Refining Co., Inc., No. 84-8087 (3d

Cir. Dee. 31, 1984); Rae v. Union Bank, 725 F.2d 478, 481 (9th

Cir. 1984) ; Bennett v. Berg, 685 F.2d 1053, 1061 (8th Cir. 1982) ;

United States « Computer Science Corp., 689 F.2d 1181, 1190

(4th Cir. 1982), cert. denied, 459 US. 1105 (1983); Willamette

Savings & Loan v. Blake & Neal Finance Co., 577 F. Supp. 1415,

1427 (D. Or. 1984); Wilcor Development Co. v. First Interstate

Bank of Oregon, N.A., 590 F. Supp. 445 (D. Or. 1984) ; Kaufman

v. The Chase Manhattan Bank N.A., 581 F. Supp. 350 (S.D.N.Y.

1984) ; Nelson v. National Republic Bank, [1984 Transfer Binder]

Fed. See. L. Rep. (CCH) 91,481 (N.D. Ill. 1984) ; Kirschner v.

Cable/Tel Corp., 576 F. Supp. 234 (E.D. Pa. 1983) ; D&éG Enter-

prises v. Continental Illinois National Bank, 574 F. Supp. 263,

270 (N.D. Ill. 1983) ; Yancoski v. E. F. Hutton & Company, Inc.,

581 F. Supp. 88 (E.D. Pa. 1983).

16 .

Pal nalogue of or-

tatutory ‘“‘person’’ is the a gue 0

po penn while the statutory “enterprise” is the

infiltrated business, victimized by its takeover or

domination by the ‘‘person’’ whose — em om

ish. Whether the -

was aiming to deter and punish. v a wile

” sued are truly members of organiz

ian ~ pointed out above, irrelevant, since og :

chose to permit suits against those b sepia om se

! ; 4

ed in the enumerated predica ac > :

aan also conducted the affairs of a —— _

prise’ through a pattern of racketeering activity.

Reading the key statutory provisions together and

considering the purposes renege te | a be tec

tfully submit that a civil RI e ge

viaintiff "should be required to prove (1) the —— nd

aan by a defendant ‘‘nerson’’ of the —s oe

of racketeering activity,’’ (2) substanti ry) age

or control of that ‘“‘person’’ (3) over the con yale

the affairs of a separate “enterprise ue yo

pattern of eg eg 1 ee bn By ~ 2 Ae

ing to the plainti m the

prez ‘<allemeaian ’3” affairs through such a pattern.

Application of the statutorily-rooted stage oA g a

set forth above will screen out those a. aps a

not present the concerns Congress —_ 0 co

in RICO, while still preserving a right oe

for appropriate victims of a ‘‘pattern 0 bre et

ing activity.”’ In this he “ go : re A

allegation that any individual or | OO ie

7 *¥ eparate and independen ,

(the | S100 snr zeoe = by reason of the caren s

domination or control, to overcharge the pe wed

conducting the enterprise’s affairs throug

17

acts of mail fraud. The mail fraud allegations are

instead directed solely at the bank itself, and the

bank’s actions are not alleged to have been affected

in any way by any other entity.

While the Seventh Cireuit recognized below that

RICO required a separate “ person’’ and “‘enterprise”’

for civil liability to be found, it erroneously held that

the bank defendant could be said to have operated

the affairs of its holding company parent because ‘‘we

think it virtually self-evident that a subsidiary acts

on behalf of, and thus conducts the affairs of, its

parent corporation.’’ Haroco, 747 F.2d at 402-403. Such

reasoning completely ignores both RICO’s language

and purpose. The approach adopted by the Seventh

Circuit fails to recognize that there is no allegation

in this case that the bank, in the act of overcharging

its borrowers, dominated or controlled its parent in

such a way as to cause the parent to act in an illegal

manner. Instead, the total relationship at issue in this

ease is that of bank to borrower; and that relation-

ship does not implicate in any active manner the

affairs of the bank holding company. Indeed, the addi-

tion of the bank holding company in this very case

was an afterthought in an Amended Complaint which

was ‘filed only after a Motion to Dismiss attacked the

original Complaint’s characterization of the bank as

both the ‘‘person” and ‘‘enterprise.”” The bank hold-

ing company was neither sued nor mentioned in the

original Complaint.

The Seventh Circuit’s approach, moreover, makes

RICO civil liability ultimately turn on the neutral,

passive fact of whether the defendant *‘person’’ hap-

pens to be an independent or affiliated corporation,

rather than requiring active conduct by the defendant

18

which causes illegal activity by a separate entity by

virtue of the defendant’s domination or control -<

that entity. In doing so, the court acted ——— y

with the decision of this Court in Copperweld “-

v. Independence Tube Corp., 104 S.Ct. 2731 (19 ’

in which the Court held that a parent corporation an

a wholly owned subsidiary are incapable of conspiring

with one another for purposes of the antitrust a

The Seventh Circuit in this case expressly st

to follow Copperweld because of allegedly ~_

premises behind RICO and the antitrust many :

maintain that this is not an adequate distinction. Wha

this Court said about parents and subsidiaries ; be

equally true and applicable without regard for the

particular context:

and its wholly owned subsidiary have a

a unity of interest. Their objectives -

common, not disparate; their general corporate

actions are guided or determined not by eet

arate corporate consciousnesses, but one. /d. a

2742.

liability is to be predicated upon the interrela-

dentin my bank and bank holding company, 4

RICO plaintiff must be able to allege some a

fu] domination or control by one of those entities e

‘‘nerson’’) over the affairs of the other (the “‘en oa

prise’’) in such a way as to cause the other to —

illegal activity as a matter of corporate policy ors

by the defendant. A mere relationship or associa —

without more, is a neutral fact under RICO, w “

requires the active ‘‘eonduct” by the ‘ person of “

affairs of the “‘enterprise.’’” As the Eighth Cireui

‘It is for this reason that the suggestion that individual em-

ployees, such as loan officers, could be viewed as the RICO ‘“‘per-

19

en banc properly held in Bennett v. Berg, 710 F.2d

1361, 1364 (1983) on this very point:

(T]he en bane court is concerned that the com-

plaint may be deficient as failing to allege ade-

quately the requisite de of participation in or

conduct of the affairs of an enterprise on the part

of each named defendant. Mere participation in

the predicate offenses listed in RICO, even in

conjunction with a RICO enterprise, may be in-

cient to support a RICO cause of action. A

defendant’s participation must be in the conduct

of the affairs of a RICO enterprise, which ordi-

narily will require some participation in the opera-

tion or management of the enterprise itself.

The appropriate parameters of a special racketeer-

ing activity requirement can further be illustrated by

a comparison of the results which would be obtained

under the four-part test suggested in this section with

those obtained by the Second Circuit in its recent

decisions in Sedima and Bankers Trust.

While the Second Circuit dismissed both cases, we

respectfully submit that the dismissal in Sedima was

correct (though for different reasons), but that the

result in Bankers Trust cannot be harmonized. with

RICO’s statutory purpose. Sedima involved a claim

that the plaintiff was defrauded by, its joint venturer

sons’’ is also unsound, unless such individuals exercised such

domination \r control over the enterprise bank as to affect its

corporate policies. Otherwise, an illegal act of mail fraud by a loan

officer might result in the ‘‘enterprise’’ bank itself being held

liable even where it was not involved in the individual’s wrong-

doing, a result wholly inconsistent with the clear statutory lan-

guage, as well as the policies underlying RICO.

20

i through

sale of goods to a foreign company

pear te oh purchase orders and other false documents

which overstated costs. Since the joint venturer “al

fendant’s own fraudulent acts provided the basis ~

the RICO claims and the alleged fraud did not invo ve

the domination or control by any discrete persons’

over the affairs of the joint venturer a,

defendant, the RICO claims were properly dismissed,

since these claims did not implicate any of the con-

cerns which caused Congress to enact RICO.

In Bankers Trust, by contrast, allegations of a —

of fraudulent acts by a group of controlling enter

uals and entities to strip a dominated eng ape 0

valuable assets, rendering it unable to repay the p ain-

tiff bank on a loan, are sufficient, in our view, to ported

the special racketeering activity requirement =

eated in this Brief. Bankers Trust clearly identifies

a group of discrete controlling ‘‘persons’’ who case

nated the borrower “‘enterprise”’ (Braten a

Corporation) and caused its affairs to be operated )

the detriment of the plaintiff bank by stripping Braten

of assets through a series, of fraudulent acts, —

teristic of organized crime, which qualified under

Section 1961(5) as a “pattern of racketeering activ-

ity.’”’ In our view, this is all that RICO requires.

21

CONCLUSION

For the reasons stated herein, we respectfully urge

the Court to adopt a construction of the Racketeer

Influenced and Corrupt Organizations Act which

would allow recovery of treble damages, costs and

attorneys fees in those cases where a defendant has

acted in a fashion characteristic of organized crime

and has infiltrated and controlled or dominated a

separate enterprise, all other elements of the claim

being satisfied. This focus on the special nature of the

activity involved rather than the special nature of

the injury is a reasonable solution to an otherwise in-

tractable definitional problem. Properly applied, the

approach suggested will require neither that the

statute be used to cover cases never intended by Con-

gress nor that victims of true racketeering activity

be deprived of the remedies Congress clearly intended

for them. Moreover, the suggested approach fits well

within the plain meaning of the statute and the legis-

lative intent.

If the approach we suggest is adopted, the case now

before the Court should be returned to the federal

district court for further proceedings, in which the

plaintiffs will be required to plead and prove, if they

can, that the activities of the defendant bank were so

far beyond the pale of normal business activity as to

be characteristic of organized crime, and that the

defendant bank controlled or dominated a separate

22

enterprise in a manner reminiscent of an infiltration

of the enterprise by organized crime.

Respectfully submitted,

Of Counsel:

Epwarp F’. MannrIno

DiworTH, Paxson,

Kauisn & KauFFMAN

2600 The Fidelity Bldg.

Philadelphia, Pa. 19109

February 25, 1985

Joun J. Gru

General Counsel

Counsel of Record

Jonanna M. SaBou

Associate General Counsel

Micuaet F. Crotrry

Associate General Counsel-

Litigation

Attorneys for Amicus Curiae

American Bankers Association

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 467-4240