Petition for Writ of Certiorari — Walk v. Baltimore & Ohio Railroad

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Supreme Court, U.S.

88-558 FILED

SEP 24 198

N O. JOSEPH F. SPANIOL, JR,

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IN THE

Supreme Court of the United States

October Term, 1988

MARGARETHA WALK, an individual, and MAURICE WALK,

Trustees for the Cynthia Walk Trust, the Dinand M. Walk Trust,

and the Margaretha Walk Trust and VINCENT CIARLANTE,

Petitioners,

vs.

THE BALTIMORE AND OHIO RAILROAD,

CHESAPEAKE AND OHIO RAILROAD

and THE CSX CORPORATION,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

MICHAEL P. MALAKOFF

ELLEN M. DOYLE

BERGER, KAPETAN, MALAKOFF

& MEYERS, P.C.

508 Law and Finance Building

Pittsburgh, Pennsylvania 15219

(412) 281-4200

Attorneys for the Petitioners-Plaintiffs

Batavia Times Publishing Co.

Harold L. Berkoben E.

Pittsburgh, Pa. (412) 881-7463

i.

Questions Presented

1. Whether a series of episodes of criminal activity

spanning a ten year period involving thousands of

investors in four different corporations constitutes only

one RICO scheme which is not a sufficient pattern of

racketeering activity within the meaning of RICO?

2. Whether the Fourth Circuit’s requirement that the

RICO conduct alleged also “pose a special threat to

social well-being’ is unconstitutionally vague?

TABLE OF CONTENTS.

Page

Questions Presented............. Perr eT Cr Tr i

TE vv. chcescébescesbaceaneadudbens ii

UE PID vk cc ccc cccncesecesvenetenaeen ili

Statement of SUTISGictson .... oc ccccccccsevcccces 1

ee I a rn 6 b6 006d 5 0860 ods Be ee eee 2

GE GE GD SIO o.oo. c vc cccavccancsdasescens 3

Reasons for Granting ee WO 6450 -06s0405 eens 7

1. This Honorable Court has _ already

recognized the need to resolve the differences

existing among the Courts of Appeals with

respect to RICO’s pattern requirement........ 7

2. The Fourth Circuit’s attempt to

distinguish between racketeering activities on

- the basis of its personal, undefined notions as

to what activities ‘“Pose A Special Threat To

Socia: Well-Being’’ creates an

unconstitutionally vague standard of conduct.. 10

Cs a 0 kd dc kab ekcdecdaseseenriee 15

Appendices:

Appendix A—Text of Sections 1961(1), 1961(5),

1962(a), and 1962(c) of the Racketeer Influenced

and Corrupt Organizations Act, 18 U.S.C.

fF Peer e eee reer re ree ee Al

Appendix B—Opinion of the United States

District Court for the District of Maryland

SREDs a6 oc eesdceceesscnsetede nee A3

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988)....... Al0

Page

TABLE OF AUTHORITIES.

Bank of America v. Touche Ross & Co., 782 F.2d

CS Coke Sec evadebcccecccece 9

Barticheck v. Fidelity Union Bank/First Nat. State,

co 9

Beck v. Manufacturers Hanover Trust Company,

820 F.2d 46 (2d Cir. 1987), cert. denied, 108 S.Ct.

CEES chu dhe nae es 6GbBe 6s cccsccecece 13

H.J. Inc. v. Northwestern Bell Telephone Company,

829 F.2d 648 (8th Cir. 1987), cert. granted,

108 S.Ct. 1219 (March 21, 1988) (No.

CeCe E le. occ cc eeseessecscccccecs 7,8,9

International Data Bank v. Zepkin, 812 F.2d

acc k epee eee eceatesccccccs 10

Lanzetta v. New Jersey, 306 U.S. 451 (1939)....... 12

Liquid Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir.

1987), Petition for Certiorari pending at No. 87-

DECC UTEGENACNEG GSO ees c ccc deccccccce 8

Lockspeiser v. Western Maryland Company, 768

EE MEME, we cccccccccccccccececs 4

Pittsburgh Terminal Corporation v. .Baltimore &

Ohio R. Co., 680 F.2d 933 (3d Cir.), cert. denied,

EE Cece cess ceccscossecs 3

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479

eee ke beset ececccecccces 10,12

United States v. Boyer, 694 F.2d 58 (3d Cir

ei. dieses oi soeenbeeceseescees 13

United States v. Carter, 493 F.2d 704 (2d Cir

re oes Ue GL he 6 ke cedccnecceces 11

United States v. Griffin, 660 F.2d 996 (4th

ER 13

United States v. Ianniello, 808 F.2d 184 (2d

iv.

Page

United States v. Tillett, 763 F.2d 628 (4th

Che: TS 0.0 ons ce heals cukbbins da as cet 13

Walk v. B&O Railroad Co., 659 F.Supp. 824 (D.Md.

1987), aff'd. 847 F.2d 1100 (4th Cir. 1988) ....... 4,8

Yellow Bus Lines, Inc. v. Local Union 639, 839 F.2d

SS Ee kona bods Kondandeortereuks 9

IN THE

Supreme Court of the United States

October Term, 1988

No.

MARGARETHA WALK, an individual, and MAURICE

WALK, Trustees for the Cynthia Walk Trust, the

Dinand M. Walk Trust, and the Margaretha Walk

Trust, and VINCENT CIARLANTE,

Petitioners,

vs.

THE BALTIMORE AND OHIO RAILROAD,

CHESAPEAKE AND OHIO RAILROAD,

and THE CSX CORPORATION,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Statement of Jurisdiction

Jurisdiction in the District Court was based on 18

U.S.C. §$1964(a) and on diversity of citizenship under 18

U.S.C. $1332. Jurisdiction in the Court of Appeals for

the Fourth Circuit was based on 28 U.S.C. §1291 because

the dismissal of the Complaint constituted a final and

appealable order.

The jurisdiction of this Court to review the judgment

of the Fourth Circuit is invoked under 28 U.S.C.

$1254(1).

Statute Involved

The text of sections 1961(1), 1961(5), 1962(a), and

1962(c) of the Racketeer Influenced and Corrupt

Organizations Act, 18 U.S.C. $1961 et seg. is reprinted in

the Appendix and designated Appendix A.

3

Statement of the Case

Margaretha and Maurice Walk, as trustees, and

Vincent Ciarlante {hereafter collectively referred to as

‘“‘Walks”], and other minority shareholders of the

Baltimore & Ohio Railroad [“‘B&O’’] filed a class action

against CSX Corporation and other affiliated

corporations [““CSX’’] alleging a series of mail fraud and

securities fraud transactions spanning a period of ten

years taken by CSX against various minority equity

holders of its subsidiary corporations.

The first scheme was executed on December 13, 1977

and involved the transfer of the majority of the B&O’s

non-rail assets, including vast real estate holdings, into a

shell subsidiary corporation, and the declaration on that

same day of a dividend in kind of the subsidiary’s stock

to the holders of B&O’s common stock, without any

notice to the B&O’s convertible debentureholders. The

first scheme described in Walks’ Complaint [Scheme

One’’] has already been found to be a securities violation

directed against hundreds of investors. See generally

Pittsburgh Terminal Corporation v. Baltimore & Ohio R.

Co., 680 F.2d 933, 943 (3d Cir.), cert. denied, 457 U.S.

1056 (1982).

The second scheme involved a 1983 merger of one of

B&O's major operating railroads, the Western Maryland

Railway [“WMR’’], into a wholly owned subsidiary of

CSX, thereby eliminating all minority shareholder

interests in the WMR.

The third scheme involved a 1983 merger of the

Western Maryland Company [‘““WMC’’], which had no

employees and no operations, but owned valuable assets,

into another CSX wholly owned subsidiary, thereby

eliminating all minority interests in the WMC. A court of

appeals suggested that Scheme Three set forth a

4

violation of the Exchange Act. See Lockspeiser uv.

Western Maryland Company, 768 F.2d 558, 561 (4th Cir.

1985).

The fourth scheme involved the elimination of all of the

minority shareholder interests in the B&O in a 1987

merger of B&O into another of CSX’ wholly owned

subsidiaries.

The Walks’ Amended Complaint alleged numerous

criminal acts of mail fraud and securities fraud by CSX

and its affiliates in carrying out the four schemes. The

District Court (659 F.Supp. 824 (D.Md. 1987)) found the

two RICO counts of Walks’ Amended Complaint

deficient in four respects:

1. The Complaint failed ‘to characterize the

defendants as persons who regularly commit

federally indictable fraud.” Jd. at 825.

2. The Complaint failed to characterize “‘the railroad

defendants as persons whose criminal conduct

poses a ‘special threat to social well-being.’ ’’ Id.

3. “Despite plaintiffs’ counsel’s ingenuity in

identifying multiple fraudulent ‘schemes,’ ...

there is but one real ‘scheme’ alleged in this case.”

Id., and

4. The Complaint “involves ordinary claims of fraud

.. which are best left to state law.”’ Id.

The Court of Appeals for the Fourth Circuit affirmed

the dismissal (847 F.2d 1100 (4th Cir. 1988)) finding that

the Walks had failed to satisfy the pattern of

racketeering activity requirement of Sections 1962(a) and

(c). Id. at 1102. The Fourth Circuit recognized that the

RICO issue it was deciding had “‘bitterly divided the

circuits”:

5

As Zepkin and the cases following it illustrate, it

is the continuity aspect of Sedima's pattern analysis

which has given us the greatest difficulty in

ae We are not alone in this regard—the

mn of the continuity prong has

bitterly divided the circuits. Jd. at 1103.

The Fourth Circuit admitted its own difficulty in

articulating a standard for the pattern of racketeering

requirement:

Since Sedima, the lower courts have struggled to

give content to the vague notions of ‘continuity’ and

‘relationship that are now considered the distinctive

characteristics of the RICO ‘pattern.’ ... this task

has not been an easy one, for the terms

‘relationship’ and ‘continuity,’ as used in Sedima,

are inherently contradictory. ‘Relationship implies

that the predicate acts were committed close

together in time, involve the same victim or type of

misconduct, or both; ‘continuity’ implies more

extended periods of time almost inevitably involving

different victims. Jd. at 1003.

The Fourth Circuit, stating that the Walks’ claims

present the “closest question yet’’, found that the Walks

had failed to state a claim for relief under RICO because

they had not properly alleged a pattern of racketcering

activity even though “the predicate acts alleged here

span a period of ten years and can be grouped into

several distinct ‘episodes’ of activity, each of which is

arguably self-contained.” Jd. at 1104-05.

The Fourth Circuit distinguished between the

securities and mail fraud schemes alleged by the Walks

and schemes involving other kinds of predicate acts,

which it considered to be of a more serious criminal

dimension:

6

[T]he objective of the related predicate acts is a

factor to be considered in assessing the criminal

dimension and degree. In this case, that objective is

sufficiently limited that we cannot say the related

predicate acts suggest ongoing criminal activity of

sufficient scope and persistence to pose a special

threat to social well-being. Jd. at 1005.

The Walks filed a petition for rehearing en banc to

request the entire Court of Appeals to resolve the

conflict between the holding of the Panel and the holdings

of the majority of the other Courts of Appeais, which

was denied by the Fourth Circuit on June 30, 1988.

7

REASONS FOR GRANTING THE WRIT

1. This Honorable Court has already recognized the

need to resolve the differences existing among the

Courts of Appeals with respect to RICO’s pattern

requirement.

On March 24, 1988, this Court granted certiorari in

H.J. Inc. v. Northwestern Bell Telephone Company, 829

F.2d 648 (8th Cir. 1987), cert. granted, 108 S.Ct. 1219

(March 21, 1988) (No. 87-1252), in order to review the

opinion of the Court of Appeals for the Eighth Circuit

dismissing a complaint for failure to allege the ‘‘pattern of

racketeering activity’’ requirement of RICO. The Eighth

Circuit requires that, in addition to the predicate offenses

being alleged, there must be a claim that the predicate

offenses constitute multiple schemes and that there is

criminal activity other than that relevant to the RICO case

being brought.

Other Courts of Appeals have disagreed with the

Eighth Circuit’s grafting of a multiple scheme

requirement onto RICO’s pattern requirement, but have

disagreed among themselves as to what constitutes a

pattern. The Seventh Circuit, for example, attempted to

develop a list of factors to be considered in determining

whether such a pattern existed:

Relevant factors include the number and variety of

predicate acts and the length of time over which

they were committed, the number of victims, the

presence of separate schemes and the occurrence of

distinct injuries. Morgan v. Bank of Waukegan, 804

F.2d 970, 975 (7th Cir. 1986).

The Third Circuit also attempted to objectify the

analysis of the pattern requirement:

8

[T]he existence of a RICO pattern does not turn on

the abstract characterization of racketeering acts as

‘continuous’ and ‘related’ but rather on a

combination of specific factors such as the number

of unlawful acts, the length of time over which the

acts were committed, the similarity of the acts, the

number of victims, the number of perpetrators, and

the character of the unlawful activity. Barticheck v.

Fidelity Union Bank/First Nat. State, 832 F.2d 36,

39 (3d Cir. 1987).

The Fourth Circuit has rejected any attempt to analyze

specific factors in determining the existence of a pattern

of racketeering activity. In Walk, 847 F.2d at 1104, it

stated:

We did not attempt to identify a range of factors

relevant to the continuity inquiry as had the

Seventh Circuit in Morgan, but we did indicate that

the inquiry ought to focus on whether the related

predicate acts suggested ‘ongoing unlawful activities

whose scope and persistence pose a special threat to

social well-being.’ Id.

This Court’s clarification of the pattern requirement in

H.J. Inc. v. Northwestern Bell Telephone Company, may

or will resolve the RICO issue presented by this Petition.

It is clear that under the standards articulated for

pleading a pattern of racketeering injury in the Third

and Seventh Circuits, the Walks’ Complaint would not

have been dismissed.

The Walks’ claims, which were dismissed by the

Fourth Circuit, involved more victims, more injuries,

more perpetrators and more predicate acts spanning a

greater period of time than the pattern of racketeering

activity found sufficient by the Seventh Circuit in Liquid

Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir. 1987)

(petition for certiorari filed at No. 87-1262), where that

Court stated:

9

Therefore, we have a single scheme which lasted

seven months and defrauded a single victim. The

defendants committed nineteen separate acts, each

resulting in use of the mails and use of the wire

service. Each time an invoice was falsely prepared,

it deprived Liquid Air of its entitlement to rent or

replacement value. Therefore, each act resulted in a

distinct injury to Liquid Air and a concomitant

benefit to D&R. We find that the repeated infliction

of economic injury upon a single victim of a single

scheme is sufficient to establish a pattern of

racketeering activity for purposes of civil RICO. Id.

at 1304.

See also the following cases where other Courts of

Appeals found substantially lesser allegations of

racketeering activity to be sufficient to state a claim

under RICO: Barticheck v. Fidelity Union Bank/First

Nat. State, 832 F.2d 36 (3d Cir. 1987) (more than two

predicate acts, involving twenty-three investors in a

limited partnership scheme); Yellow Bus Lines, Inc. v.

Local Union 639, 839 F.2d 782, 788-89 (D.C. Cir. 1988)

(petition for certiorari filed 88-190) (ten predicate acts,

one victim, one scheme); and Bank of America v. Touche

Ross & Co., 782 F.2d 966, 970-71 (I1lth Cir. 1986) (9

predicate acts, 5 victims, 1 scheme).

It is respectfully submitted that this Court should

grant the Walks’ Petition for Certiorari, and consider

their appeal or stay the appeal pending this Court’s

review of the conflict among the Courts of Appeals as to

the requirements of RICO’s pattern of racketeering

activity in H.J. Inc. v. Northwestern Bell Telephone

Company, supra.

10

2. The Fourth Circuit’s attempt to distinguish

between racketeering activities on the basis of its

personal, undefined notions as to what activities “‘Pose

A Special Threat To Social Well-Being” creates an

unconstitutionally vague standard of conduct.

The Fourth Circuit has been exceedingly reluctant to

accept this Court’s decision in Sedima, S.P.R.L. v. Imrex

Co., 473 U.S. 479 (1985) and to permit civil RICO claims

to proceed.

Clearly the Fourth Circuit is dissatisfied with the

Congressional inclusion of mail fraud, wire fraud and

securities fraud in the predicate acts chosen by Congress

in §1961(1) of RICO. In its opinion in this case, it

distinguished between white-collar mail or securities

fraud schemes and what it perceived to be more serious

criminal schemes:

Virtually every action taken by a controlling

majority in the course of its stewardship of a

corporation is subject to challenge as either mail or

securities fraud. To hold indiscriminately that proof

of several such acts occurring over the course of a

period of years constitutes a RICO pattern would be

to make the statute’s extraordinary penalties

available to virtually every disgruntled minority

shareholder harmed in the process. Such a result

would not only have a chilling effect on the

transaction of legitimate corporate business, but

also sanction a use of the RICO statute that we do

not think Congress intended. Jd. at 1105.

See also the Fourth Circuit’s discussion in the opinion

below of its prior decision in International Data Bank v.

Zepkin, 812 F.2d 149 (4th Cir. 1987):

In Zepkin ... we recognized that a ‘single, limited

scheme’ designed to perpetrate a single fraud should

not be transformed into a RICO violation simply

11

because the fraud’s commission required several acts

of mail or wire fraud; such an interpretation would,

we thought, virtually read the pattern requirement

out of the statute for it is ‘the unusual fraud that

does not enlist the mails and wires in its service at

least twice.’ Id. at 1104 (citation omitted).

In order to avoid what it feared to be abusive use of

RICO against legitimate businesses, and those

associated with legitimate businesses, the Fourth Circuit

requires that the RICO scheme alleged must ‘pose a

special threat to social well-being.’’ Jd. at 1105. The

Fourth Circuit has not yet reviewed a scheme in a civil

RICO action which poses such a special threat to social

well-being, since it has not upheld the sufficiency of a

single civil RICO complaint, but it has suggested that ‘‘a

scheme that contemplates a repeated infliction of

independent economic injuries—e.g., a series of bank

robberies or embezzlements’’, might satisfy its standard.

Id. at 1106.

In the Fourth Circuit, the usual mail or wire frauds

committed by ordinary white-collar criminals do not

appear to be actionable in civil RICO proceedings. Jd. at

1104. Contrast United States v. Carter, 493 F.2d 704 (2d

Cir. 1974):

The fact that the alleged perpetrators are

presumably neapectes and entrusted with

responsibility ... by stockholders does not suggest

. that they are incapable of engaging in organized

criminal activity. We all stand equal before the bar

of criminal justice, and the wearing of a white collar,

even though it is starched, does not preclude the

organized pursuit of unlawful profit. Jd. at 708.

The Fourth Circuit’s dissatisfaction with the scope of

RICO is inconsistent with the statute’s scope as drafted.

Congress fully appreciated the breadth of RICO’s civil

provisions. In a law review article by Senator McClellan

12

(a sponsor of and chair of the subcommittee which wrote

the statute) he stated:

It is impossible to draw an effective statute which

reaches most of the commercial activity of organized

crime, yet does not include offenses commonly

committed by persons outside of organized crime as

well. McClellan, The Organized Crime Act (S. 30) or

its Critics: Which Threatens Civil Liberties?, 46

Notre Dame L.Rev. 55, 143-44 (1970).

The Fourth Circuit’s engrafting of an additional

requirement onto RICO’s pattern requirement is

inconsistent with Sedima, which rejected any judicial

amendment of RICO to add amorphous requirements

designed at limiting the application of RICO, 473 U.S. at

500, and creates a standard which is unconstitutionally

vague. This Court has long recognized the need for

criminal statutes to provide reasonable notice of the

conduct which they proscribe:

That the terms of a penal statute creating a new

offense must be sufficiently explicit to inform those

who are subject to it what conduct on their part will

render them liable to its penalties is a _ well-

recognized requirement, consonant alike with

ordinary notions of fair play and the settled rules of

law; and a statute which either forbids or requires

the doing of an act in terms so vague that men of

common intelligence must necessarily guess at its

meaning and differ as to its application violates the

first essential of due process of law. Connally v.

General Constr. Co., 269 U.S. 385, 391 (1926).

See also Lanzetta v. New Jersey, 306 U.S. 451 (1939),

where this Court found unconstitutionally vague a

statute penalizing ‘‘gangsters.”

13

RICO contains both criminal and civil provisions,

which require a uniform interpretation. The pattern oi

racketeering activity requirement contained in 18 U.S.C.

§§1962(a) and (c), applies equally to RICO’s criminal

provisions. See Beck v. Manufacturers Hanover Trust

Company, 820 F.2d 46 (2d Cir. 1987), cert. denied, 108

S.Ct. 698 (1988), where the Second Circuit applied its

criminal RICO requirements developed in United States

v. Ianniello, 808 F.2d 184 (2d Cir. 1986), to a civil RICO

complaint. See also United States v. Boyer, 694 F.2d 58

(3d Cir. 1982), where the Third Circuit stated:

The standard of proof for civil liability in fraud is

lower than the proof beyond a reasonable doubt

required for a criminal conviction. But there is no

reason to suppose that in enacting criminal

statutes prohibiting mail fraud or securities fraud

the Congress intended that the substantive element

of the offense—the scienter—should be different

than for civil liability for fraud. Jd. at 60.

The Fourth Circuit’s announcement below that it will

determine on a case by case basis whether ‘‘the related

predicate acts suggest ongoing criminal activity of

sufficient scope and persistence to pose a special threat

to social well-being” renders RICO’s pattern of

racketeering requirement unconstitutional in _ its

application. Significantly, the Fourth Circuit has failed to

mention this requirement in its affirmance of criminal

RICO convictions. United States v. Griffin, 660 F.2d 996

(4th Cir. 1981) and United States v. Tillett, 763 F.2d 628

(4th Cir. 1985). The standard provides no guidance to

those whose conduct it seeks to prevent.

In fact, the purpose of the standard appears to be to

permit the court to arbitrarily select from among those

engaging in RICO predicate acts the defendants against

whom the court will permit civil actions to be brought:

14

The intent of Congress is not that RICO be used

under all circumstances. Its intent is that RICO be

used against racketeers, individuals who earn their

livelihood through the repetitive and continuous

commission of criminal acts. The statute, properly

read, is not a “catch-all,” but is instead a powerful

tool to be used against racketeers and organized

crime. Too frequently, this statute is used by

attorneys against legitimate businesses. ... Gatoil

(U.S.A.), Inc. v. Forest Hill State Bank, No. 86-3579

(Unpublished). 6 RICO L.Rptr. 316, 321 (4th Cir.

June 17, 1987).

This case provides yet another example where the

Fourth Circuit is excluding those associated with

“legitimate” businesses who violate the wire, mail and

securities laws from the scope of RICO.

This Court should grant the Walks’ petition for

certiorari and reverse the Fourth Circuit’s dismissal of

the Walks’ Complaint on the grounds that RICO’s

pattern of racketeering requirement does not additionally

require a determination by a court that the conduct

alleged poses ‘“‘a special threat to social well-being.”’

15

Conclusion

For the reasons stated above, Petitioners Margaretha

Walk, Maurice Walk, as Trustee, and Vincent Ciarlante,

respectfully request this Honorable Court to grant their

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit.

Respectfully submitted,

BERGER, KAPETAN, MALAKOFF

& MEYERS, P.C.

MICHAEL P. MALAKOFF

ELLEN M. DOYLE

508 Law & Finance Building

Pittsburgh, Pennsylvania 15219

(412) 281-4200

Attorneys for the Petitioners-Plaintiffs

Dated:

Al

APPENDIX A

Text of Sections 1961(1), 1961(5), 1962(a), and 1962ic) of

the Racketeer Influenced and Corrupt Organizations

Act, 18 U.S.C. $1961 et seg.

§1961. Definitions

As used in this chapter—

(1) “racketeering activity’’ means ... *** (B) any

act which is indictable under any of the following

provisions of title 18; ... *** section 1341 (relating

to mail fraud), section 1343 (relating to wire fraud),

(3) “person” includes any individual or entity

capable of holding a legal or beneficial interest in

property;

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

partnership, ccrporation, association, or other legal

entity, and any union or group of individuals

associated in fact although not a legal entity;

(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 imprisonment} after the

commission of a prior act of racketeering activity;

§1962. Prohibited activities

(a) It shall be unlawful for any person who has

received any income derived, directly or indirectly, from

a pattern of racketeering activity or through collection of

an unlawful debt in which such person has participated

as a principal within the meaning of section 2, title 18,

United States Code, to use or invest, directly or

indirectly, any part of such income, or the proceeds of

A2

Appeal A—Text of Sections 1961(1), 1961(5), 1962(a), and

1962(c) of the Racketeer Influenced and Corrupt

Organizations Act, 18 U.S.C. $1961 et seq.

such income, in acquisition of any interest in, or the

establishment or operation of, any enterprise which is

engaged in, or the activities of which affect, interstate or

foreign commerce. ... *** controlling or participating in

the control of the issuer, or of assisting another to do so,

shall not be unlawful under this subsection if the

securities of the issuer held by the purchaser, the

members of his immediate family, and his or their

accomplices in any pattern or racketeering activity or the

collection of an unlawful debt after such purchase do not

amount in the aggregate to one percent of the

outstanding securities of any one class, and do not

confer, either in law or in fact, the power to elect one or

more directors of the issuer.

(c) It shall be unlawful for any person employed by or

associated with any enterprise engaged in, or the

activities of which affect, interstate or foreign commerce,

to conduct or participate, directly or indirectly, in the

conduct of such enterprise’s affairs through a pattern of

racketeering activity or collection of unlawful debt.

A3

APPENDIX B

Opinion of the United States District

Court for the District of Maryland (1987)

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MARYLAND

MARGARETHA WALK, an Individual, and MAURICE

WALK, Trustees for the Cynthia Walk Trust, the

Dinand M. Walk Trust, and the Margaretha Walk

Trust, and VINCENT CIARLANTE,

Vv.

THE BALTIMORE AND OHIO RAILROAD,

THE CHESAPEAKE AND OHIO RAILROAD

and the CSX CORPORATION.

Civil No. S 87-488

John B. Isbister, Esq., Tydings & Rosenberg, of

Baltimore, Maryland, and Michael P. Malakoff, Esq. and

Ellen M. Doyle, Esq., Berger, Kapetan, Malakoff &

Meyers, P.C., of Pittsburgh, Pennsylvania, for plaintiffs.

Richard Magid, Esq., Ward B. Coe, III, Esq., and

William F. Ryan, Esq., Whiteford, Taylor & Preston, of

Baltimore, Maryland, for defendants.

Smalkin, District Judge.

Filed: May 6th, 1987.

A4

Appendix B—Opinion of the United States District

Court for the District of Maryland (1987).

This is a three-count civil action before the Court on a

pre-answer amended complaint, filed pursuant to 28

U.S.C. §§1331 and 1332, by minority shareholders of the

B&O Railroad. (They seek class action status.) The first

two counts claim civil violations of the Racketeer

Influenced and Corrupt Organizations [RICO] statute, 18

U.S.C. $1961 et seg. The third count claims violation of a

state-law based fiduciary duty owed to the minority

B&O shareholders by the defendant C&O, and its parent

CSX, as owners of the majority interest in B&O. The

matter is now before the Court on the defendants’ motion

to dismiss the amended complaint, which has been

briefed and opposed. No oral argument is necessary.

Local Rule 6, D. Md.

The Court is convinced beyond a doubt, see Conley v.

Gibson, 355 U.S. 41, 45-46 (1957), that this complaint

fails to state a civil RICO claim under 18 U.S.C. $1962,

because it does not allege, nor could it be further

amended to allege, a legally sufficient “pattern of

racketeering activity.’’ Although the complaint recites a

prolix catalogue of events and “schemes” going back

many years (to 1977) and involving a number of persons

and entities other than B&O minority shareholders, it

shows no “pattern of racketeering activity’ as that

statutory RICO requirement has been interpreted in the

Fourth Circuit. In International Data Bank, Ltd. v.

Zepkin, 812 F.2d 149 (4th Cir. 1987), the Court stated

that the “‘pattern of racketeering activity’’ requirement

was intended to limit civil RICO to “those cases in which

racketeering acts are committed in a manner

characterizing the defendant as a person who regularly

commits’’ certain crimes. Clearly, this complaint is

A5

Appendix B—Opinion of the United States District

Court for the District of Maryland (1°87).

inadequate to characterize the defendants as persons

who regularly commit federally indictable fraud. In fact,

the discrete predicate acts of criminal fraud apparently

alleged in this complaint include only certain activities

pertaining to debenture holders in 1977, already the

subject of another lawsuit, and the mailing of a

supplemental brief in that lawsuit in 1982 (Amended

Complaint, 4432-36), the mailing of two proxy statements

on March 18, 1983 (/d., 4440, 46), and the mailing of a _

press release and notice pertaining to the challenged

merger. (Id., 458, 61). As noted by the Supreme Court in

Sedima, S.P.R.L. v. Imrex Co., Inc., 105 S. Ct. 3275, 3285

n.19 (1985), two predicate criminal racketeering acts are

necessary, but not sufficient, to make out a pattern of

racketeering activity. In the Fourth Circuit, what

suffices has been settled by International Data Bank:

What constitutes a RICO pattern is thus a matter

of criminal dimension and degree. To allow a

“pattern of racketeering” to flow from a single,

limited scheme such as this one would undermine

Congress’ intent that RICO serve as a weapon

against ongoing unlawful activities whose scope and

persistence pose a special threat to social well-being.

The present case does not involve a “pattern of

racketeering,’ but ordinary claims of fraud best left

to “‘the state common law of frauds’’ and to “‘well-

established federal remedial provisions.”

812 F.2d at 155.

Despite plaintiffs’ counsel’s ingenuity in identifying

multiple fraudulent ‘schemes,’ as portrayed in their

dismissal opposition (filed May 5, 1987) at 3-4, there is

but one real “‘scheme’”’ alleged in this case, and that has

to do with the valuation of minority shares and the

A6

Appendix B—Opinion of the United States District

Court for the District of Maryland (1987).

treatment of minority shareholders in the B&O. The

carefully sifted sands through which plaintiffs have

combed to find their ‘‘schemes’’ do not form any firm

foundation for characterizing the railroad defendants as

persons whose criminal conduct poses a “special threat

to social well-being.’’ Jd. In short, this case involves

ordinary claims of fraud, and no more, which are best left

to state law. Thus, it fails to state a claim under RICO,

and counts 1 and 2 will be dismissed by an order to be

entered separately, for failure to state a claim upon

which relief can be granted. Fed. R. Civ. P. 12(b)(6).

Count 3 alleges breach of fiduciary duty to minority

shareholders, but it utterly fails to show any legally

cognizable, timely-asserted injury to them short of the

allegedly less-than-fair value presently being offered for

their stock. The claims relating to the treatment of B&O

minority shareholders arising from or at issue in the

“PTC” litigation are clearly barred by limitations or are

foreclosed by the judgment rendered March 31, 1987 by

the United States District Court for the Northern

District of Ohio in Pittsburgh Terminal Corp. v. The

Baltimore and Ohio Railroad, et al., Civil No. C 84-1267,

a situation that plaintiffs’ opposition does not address.

This Court is of the opinion that the remaining claim in

the third count, viz., freeze-out of minority shareholders

at an inadequate price (which is the only claim really at

issue, see, e.g., plaintiffs’ opposition at 34, first full

paragraph), is not cognizable under Maryland law as

pleaded, because the plaintiffs can avail themselves of

the remedy of appraisal, as provided in Md. Corps. &

Assn’s Code Ann. $§3-106 and 3-201—3-212 (1957, 1985

Repl. Vol.).

AZ

Appendix B—Opinion of the United States District

Court for the District of Maryland (1987).

Although Judge Miller of this Court recognized that

the sole minority shareholder of a Maryland corporation

in a short-form merger might have a cause of action for

breach of fiduciary duty in very limited circumstances,

Twenty Seven Trust v. Realty Growth Investors, 633 F.

Supp. 1028, 1037-9 (D. Md. 1982), he held that

‘inadequacy of price [offered for minority shares] alone

does not warrant court intervention in corporate affairs.’’

Id. at 1039, citing Homer v. Crown, Cork & Seal Co., 155

Md. 66, 79-86, 141 A. 424, 431-34 (1928). Homer is still

good law in Maryland. See Lerner v. Lerner, 306 Md.

771, 780-81 (1986). Here, inadequacy of the price being

offered for the minority shares is the only real issue in

Count III, and the non-statutory cause of action pleaded

therein is not recognized in Maryland law. In the

language of Homer itself, the question is whether, on a

reading of the entire complaint, it appears to the court

that ‘“‘the fundamental issue thus made is not fraud but

a debatable controversy over value. ...” 155 Md. at 80.

If fraud is not the fundamental issue, then, under

Homer, the statutory appraisal is the exclusive remedy.

A close reading of the amended complaint’s attempted

particularizations of “fraud’’ in connection with the

merger, at {{71-73, shows that these claims are no more

than conclusory disagreements with income and asset

valuations, stock valuations, and methods of accounting,

which fall far short of establishing the requisite fraud

under Homer to warrant an injunction against the

merger. Looking at the individual allegations of fraud,

the short-line sale contention of {71.a. does not, by itself

or in conjunction with 467, adequately demonstrate the

requisite fraud under Homer, because, inter alia, there is

no allegation that the intention to sell short lines was in

A8

Appendix B—Opinion of the United States District

Court for the District of Maryland (1987).

fact in esse before the merger price was announced. The

allegations of failure to make public projections of

income and late reporting of income do not adequately

plead the requisite fraud. (There is no duty to make public

projections of income identified by plaintiffs under

Maryland law.) Thus, {71.b. does not make out a

sufficient case of fraud under Homer. Paragraph 72

attacks the integrity of the independent financial

advisor, not of defendants, and there is no sufficient

allegation of a duty on the part of defendants to make

disclosures of Morgan Stanley’s activities so as to make

out a case of fraud under Homer. Whether taken alone or

together, these attempted allegations of fraud convince

the Court that fraud is not the essence of the plaintiffs’

claim. Rather, here, as in Homer, the fundamental issue

is inadequate price, and the few acts of ‘“fraud”’

identified by plaintiffs are insufficient, as a matter of

law, to make out together or separately the species of

fraud required to be shown before a Maryland equity

court will enjoin a short form or ‘‘cashout’’ merger.

Because the statutory appraisal mechanism is not

pleaded by plaintiffs here, and because it constitutes an

adequate and exclusive remedy under Maryland law as

applied to the facts of this case, plaintiffs’ third claim

also fails to state a claim upon which relief can be

granted, Fed. R. Civ. P. 12(b)(6), and it, too, will be

dismissed by the Order accompanying this Memorandum

Opinion.

FREDERIC N. SMALKIN

United States District Judge

A9

Appendix B—Opinion of the United States District

Court for the District of Maryland (1987).

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MARYLAND

MARGARETHA WALK, an Individual, and MAURICE

WALK, Trustees for the Cynthia Walk Trust, the

Dinand M. Walk Trust, and the Margaretha Walk

Trust, and VINCENT CIARLANTE,

Vv.

THE BALTIMORE AND OHIO RAILROAD,

THE CHESAPEAKE AND OHIO RAILROAD

and the CSX CORPORATION.

Civil No. S 87-488

ORDER r

For the reasons stated in the foregoing Memorandum

Opinion, IT IS, this 6th day of May, 1987, by the Court,

ORDERED:

1. That plaintiffs’ amended complaint BE, and the

same hereby IS, DISMISSED, for failure to state a

claim upon which relief can be granted; and

2. That the Clerk of Court mail copies of the

foregoing Memorandum Opinion and of this Order to

counsel for the parties.

FREDERIC N. SMALKIN

United States District Judge

Al0

APPENDIX C

Opinion of the United States Court

of Appeals for the Fourth Circuit (1988)

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 87-3585

Margaretha ‘Walk, an individual; Maurice Walk, Trustees

for the Cynthia Walk Trust, the Dinand M. Walk

Trust and the Margaretha Walk Trust; Vincent

Ciarlante,

Plaintiffs-Appellants,

versus

The Baltimore and Ohio Railroad;

Chesapeake and Ohio Railroad;

The CSX Corporation,

Defendants-Appellees.

Appeal from the United States District Court for the

District of Maryland, at Baltimore, Frederic N. Smalkin,

District Judge. (CA-87-488-S)

Argued January 6, 1988. Decided May 31, 1988

Before WINTER, Chief Judge, and PHILLIPS and

MURNAGHAN, Circuit Judges.

All

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

Ellen M. Doyle (Michael P. Malakoff; Berger, Kapetan,

Malakoff & Meyers, P.C.; John B. Isbister; Tydings &

Rosenberg on brief) for Appellants; Ward Baldwin Coe,

III (Wilbur D. Preston, Jr.; Richard J. Magid,; William

F. Ryan, Jr.; Whiteford, Taylor & Preston; Alan A.

Rudnick, General Counsel, CSX Corporation on brief) for

Appellees.

PHILLIPS, Circuit Judge:

Following the announcement by CSX Corp. (CSX) of a

statutory short-form merger of one of its subsidiaries,

the Baltimore & Ohio Railroad (B&O), into another, the

Chesapeake & Ohio Railroad (C&O), appellants

Margaretha Walk, Maurice Walk, and Vincent Ciarlante

(the plaintiffs), as representatives of a putative class of

minority shareholders in B&O, brought this action

challenging the merger. The complaint, which named as

defendants B&O, C&O, and CSX, alleged civil RICO

violations and breach of state law fiduciary duty. The

district court dismissed the action under Fed. R. Civ. P.

12(b)(6), concluding that the complaint alleged neither a

sufficient pattern of racketeering activity to state a civil

RICO claim nor sufficient fraud to state a claim for

breach of fiduciary duty under state law. We affirm.

I

The facts alleged by the plaintiffs, which we must take

as true for the purposes of ruling on this 12(b)(6) motion,

are essentially as follows.

B&O is a Maryland railroad corporation in which the

plaintiffs hold minority interests. Approximately 98.5%

of the outstanding shares of B&O’s common and

Al2

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

preferred stock is owned by C&O, a Virginia corporation.

C&O in turn is a wholly-owned subsidiary of CSX

Corporation, a Virginia holding company that owns a

number of transportation, real estate, and mining

concerns in the eastern seaboard region. Through its

ownership of C&O, CSX dominates and controls the

operations and financial affairs of B&O and its

subsidiaries.

Prior to 1977, B&O owned substantial non-rail assets,

including a large amount of potentially profitable real

estate. CSX. wished to develop these non-rail assets free

from the claims of B&O’s minority shareholders. To

accomplish that goal, CSX in 1977 directed B&O to

transfer virtually all its non-rail assets to its wholly-

owned subsidiary, Mid-Allegheny Corp. (MAC).

Following this transfer, CSX distributed the MAC stock

to B&O’s common shareholders as a dividend-in-kind,

without giving advance notice of the proposed dividend

to the holders of debentures convertible into B&O

common stock. The effect of this transaction was to

deprive the B&O debentureholders, who counted among

their number the representative plaintiffs, of the

opportunity to convert before the record date and

thereby to share in the anticipated profits from the

development of B&O’s non-rail assets.'

‘The plaintiffs also allege that between 1961 and 1978, CSX and

C&O tricked large numbers of B&O debentureholders into selling

their debentures to B&O at less than face value, by directing B&O

not to pay dividends on its common stock.

Al3

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

Over the next several years, CSX transferred most of

MAC’s non-rail assets to other CSX affiliates. Between

1978 and 1979, CSX directed MAC’s board of directors,

which it controlled, to approve the sale of much of

MAC’s real estate to other CSX affiliates, allegedly at

prices below fair value. In February 1983, CSX directed

MAC’s board of directors to approve the sale of MAC’s

controlling interest in the Western Maryland Co. (WMC),

a profitable timber and mineral leasing concern, to

another wholly-owned subsidiary of CSX, CSX Minerals,

Inc. (CSX-M). This sale was also allegedly at a price

below fair value. CSX then carried out a merger of WMC

into CSX-M, and in connection with this merger, sent

WMC’s shareholders a proxy statement which allegedly

contained various fraudulent misrepresentations and

omissions. ~

CSX then began to spin off B&O’s rail assets. In

February 1983, it directed B&O’s board of directors,

which it controlled, to approve the sale of B&O’s

controlling interest in the Western Maryland Railroad

Company (WMR) to B&O’s parent, C&O, at a price

allegedly below fair value. Following the sale, CSX

engineered a merger of WMR into C&O and, in

connection with this merger, mailed WMR’s shareholders

a proxy statement which allegedly contained various

misrepresentations and omissions. CSX also endeavored

to depress B&O’s earnings, by shifting certain costs

incurred in other CSX subsidiaries to it.

Finally, CSX proposed to rid itself of B&O’s minority

shareholders altogether by merging B&O into its parent

corporation, C&O. It is this proposed merger which the

plaintiffs, whose interests it would cash out, challenge in

Al4

Appendix C—Opinion of the United States Cour’

of Appeals for the Fourth Circuit (1988).

this action. Because C&O owned more than 90% of the

outstanding common stock of B&O, CSX was able to

carry out the merger without securing shareholder

approval, under Md. Corps. & Ass’ns Code Ann. §3-106.

In connection with the merger, the plaintiffs allege that

CSX made several false representations as to the value

of B&O’s assets, in order to induce them to accept less

than the fair value of their stock as a cash-out price.

Shortly after the proposed merger was announced, the

plaintiff minority shareholders filed actions against B&O,

C&O, and CSX in both state and federal court. The state

court complaint alleged essentially that the merger had

no proper business purpose, that the price offered for the

minority shares was grossly inadequate, and that C&O

and CSX had breached the fiduciary duty they owed

B&O’s minority shareholders, as holders of the majority

interest in B&O, by engaging in “unfair dealing,

coercion, deception, manipulation, and gross and palpable

overreaching tantamount to fraud.’’ The complaint

sought both injunctive relief against the merger and

damages for the losses allegedly suffered by the

plaintiffs as a result of it.

The amended federal complaint, which is the subject of

this appeal, contains three counts. The first two counts

attempt to state civil RICO claims under 18 U.S.C.

$§1962(c) and 1962(a). Both counts are based on

allegations that the defendants conceived an elaborate

scheme to deprive B&O’s minority shareholders of their

right to participate in the profits from B&O’s growth

through a series of complex corporate transactions

spanning more than a decade, that they committed

numerous acts of mail fraud in furtherance of this

Al5

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

scheme, and that these acts constitute a “pattern of

racketeering activity” under 18 U.S.C. §1961. The third

count attempts to state a claim against C&O and CSX

for breach of fiduciary duty under state law. Like its

state counterpart, the federal complaint seeks both

injunctive relief against the merger and damages based

on it.

In early April 1987, the state court denied the

plaintiffs’ request for injunctive relief against the

merger, finding the dispute to be essentially one over the

value of the minority stock, which could adequately be

dealt with in the statutory appraisal proceeding. The

plaintiffs moved for leave to file an amended complaint

setting out the allegations of fraud in greater detail. The

state court denied this motion. The plaintiffs appealed to

the Maryland Court of Special Appeals, which affirmed

the denial of leave to amend, finding that even with the

proposed amendments, the complaint failed to state a

claim for relief under state law. Further appeal is now

pending within the state court system.

On April 30, 1987, the merger was consummated,

mooting the plaintiffs’ request for prospective

injunctive relief in this action. Shortly thereafter, the

district court dismissed the federal action for failure to

state a claim. The court reasoned that the first two

counts of the amended complaint failed to allege a

sufficient pattern of racketeering activity to state a civil

RICO claim, and that the third count failed to allege the

sort of fraud necessary to support a claim for breach of

fiduciary duty under state law. This appeal followed.

Al6

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

II

18 U.S.C. $1964 enables a private plaintiff to bring a

civil action for treble damages based on a violation of

$1962. In this case, the plaintiffs’ complaint attempts to

assert civil RICO claims under both §1962(c) and

$1962(a). A crucial element of the claim under both

sections is the existence of a “pattern of racketeering

activity.”” The district court held that neither of the

RICO counts here alleged a legally sufficient pattern of

racketeering activity and dismissed on that ground. We

agree.’

The RICO statute defines a “‘pattern of racketeering

activity’’ simply as ‘‘at least two” acts of racketeering

activity within ten years of each other. 18 U.S.C.

$1961(5). Our current interpretation of this rather sparse

statutory definition has its genesis in the Supreme

Court’s decision in Sedima, S.P.R.L. v. Imrex Co., 473

U.S. 479 (1985). There the Court rebuffed a movement

* On appeal, the defendants argue that the dismissal of the civil RICO

counts may also be upheld on several other grounds not reached by

the district court: (1) failure to allege with sufficient particularity at

least two predicate acts of racketeering activity; (2) failure to allege

an “enterprise” separate and distinct from the “persons” who

committed the alleged RICO violations; (3) failure to allege an

pattern of racketeering activity; (4) failure to allege injury to business

for dismissal advanced by the defendants.

hi eseseeetmentaeeenelameamnaemmamanaiasitaedittimateiatiill

Al7

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

then afoot in the lower courts to limit the scope of the

civil RICO provisions by reading in restrictions that do

not appear on the face of the statute, such as a

requirement that the plaintiff have suffered a special

“racketeering injury.”” At the same time, however, the

Court suggested that lower courts might properly curb

the abuse of civil RICO by more careful delineation of

the “pattern” requirement. Jd. at 500. Exploring the

pattern concept in dicta, the Court suggested that while

two acts of racketeering activity are necessary to form a

pattern, they are generally not sufficient. Jd. at 496 n.14.

Because the legislative history indicates that RICO was

not meant to target ‘‘sporadic” or ‘‘isolated’’ instances of

racketeering activity, the Court said, predicate acts

constitute a pattern only when they reflect both

“continuity” and ‘‘relationship.” Jd., quoting S. Rep. No.

617, 91st Cong., lst Sess. 158 (1969).

Since Sedima, the lower courts have struggled to give

content to the vague notions of “continuity” and

“relationship” that are now considered the distinctive

characteristics of the RICO pattern.”” As the Seventh

Circuit has remarked, see, e.g., Morgan v. Bank of

Waukegan, 804 F.2d 970, 975 (7th Cir. 1986), this task

has not been an easy one, for the terms “relationship”’

and “continuity,” as used in Sedima, are inherently

contradictory. ‘Relationship’ implies that the predicate

acts were committed close together in time, involve the

same victim or type of misconduct, or both; “‘continuity’”’

implies more extended periods of time almost inevitably

involving different victims. Jd. An excessive focus on

either factor in a given fact situation may. effectively

eliminate the other. Id.

Al8

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

Recognizing this conceptual tension, we held in

International Data Bank v. Zepkin, 812 F.2d 149 (4th

Cir. 1987), that the existence of a RICO pattern must be

determined on a case-by-case basis, rather than by

reference to any set of mechanical rules. Jd. at 154-55.

Under this flexible standard, what constitutes a RICO

pattern is thus “a matter of criminal dimension and

degree,’ to be dealt with by reference to the facts and

circumstances of each particular case. Id. at 155.

As Zepkin and the cases following it illustrate, it is the

continuity aspect of Sedima’s pattern analysis which has

given us the greatest difficulty in application. We are not

alone in this regard—the proper application of the

continuity prong has bitterly divided the circuits. The

Eighth Circuit has held that the continuity necessary to

establish a pattern is not present when the predicate acts

alleged were ali committed in furtherance of a single

continuing scheme. See, e.g., Superior Oil Co. v. Fulmer,

785 F.2d 252, 257 (8th Cir. 1986). The Second and

Eleventh Circuits, by contrast, have focused solely on

the number of related predicate acts, without regard to

the existence of separate ‘“‘schemes.”’ See, e.g., United

States v. Ianniello, 808 F.2d 184, 189-93 (2d Cir. 1986);

Bank of America v. Touche Ross & Co., 782 F.2d 966,

970-71 (11th Cir. 1986). The Seventh Circuit has taken a

middle stance, holding that related predicate acts may

reflect sufficient continuity to establish a pattern, even if

they can be characterized as part of a single scheme, if

they are “ongoing over an identified period of time so

that they can fairly be viewed as constituting separate

transactions, i.e., ‘transactions ‘‘somewhat separated in

Al9

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

time and place.’”’’”’ Morgan, 804 F.2d at 975 (quoting

Graham v. Slaughter, 624 F. Supp. 222, 225 (N.D. II.

1985) (quoting United States v. Moeller, 402 F. Supp. 49,

57-58 (D. Conn. 1975))). In making this determination,

the Seventh Circuit has looked to the number and

variety of the predicate acts and the length of time over

which they were committed, the number of victims, the

presence of separate schemes, and the occurrence of

distinct injuries. Id.

In Zepkin, we adopted a flexible approach to the

continuity inquiry not unlike that enunciated by the

Seventh Circuit in Morgan. We agreed that the mere fact

that the predicate acts alleged can properly be

characterized as part of a single ongoing “scheme”

should not automatically prevent them from constituting

a pattern. 812 F.2d at 155. On the other hand, we

recognized that a “single, limited scheme’’ designed to

perpetrate a single fraud should not be transformed into

a RICO violation simply because the fraud’s commission

required several acts of mail or wire fraud; such an

interpretation would, we thought, virtually read the

pattern requirement out of the statute, for it is ‘‘the

unusual fraud that does not enlist the mails and wires in

its service at least twice.” Jd. at 154-55. We did not

attempt to identify a range of factors relevant to the

continuity inquiry, as had the Seventh Circuit in

Morgan. But we did indicate that the inquiry ought to

focus on whether the related predicate acts suggested

“ongoing unlawful activities whose scope and persistence

pose a special threat to social well-being.’’ Jd. at 155.

A20

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit. (1988).

The complaint in Zepkin alleged that the defendants

had committed multiple acts of securities fraud by

issuing a misleading prospectus to ten inventors in

connection with a single stock offering. We found this

insufficient to satisfy the continuity aspect of the

pattern requirement because the predicate acts alleged

were all designed to perpetrate a single fraud. Jd. at 154-

55. As we later explained, the multiplicity of the

predicate acts in Zepkin was more a reflection of the

nature of the underlying transaction—a securities deal

which produced numerous pieces of paper—than of the

scope and persistence of the criminal activity involved.

See HMK Corp. v. Walsey, 828 F.2d 1071, 1974 (4th Cir.

1987) (quoting Morgan, 804 F.2d at 976). Predicate acts

must be viewed in context, we stressed; the mere fact

that a particular transaction generates numerous pieces

of paper—and hence the potential for a greater number

of related predicate acts—does not necessarily mean that

those predicate acts in combination pose a special threat

to social well-being. Id.; see Morgan, 804 F.2d at 976.

In HMK Corp. v. Walsey, 828 F.2d 1071 (4th Cir.

1987), we took the analysis a step further. There the

complaint alleged that the developer defendants had

made a series of misrepresentations to government

officials in order to influence zoning decisions regarding

a certain tract of land. Unlike the predicate acts in

Zepkin, which occurred close together in time and were

related to a single transaction, these predicate acts

spanned a period of four years and could be grouped into

several distinct ‘‘episodes’’ of activity somewhat

separated in time and space. For this reason, the

plaintiffs argued that the predicate acts refiected the

A21

_ Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

continuity necessary to make out a pattern. In rejecting

this argument, we again emphasized the importance of

context. On the facts of that case, we thought both the

number of predicate acts and the length of time they

spanned to be more a reflection of the peculiar context in

which they had occurred—a protracted zoning dispute

that required the involvement of many different

governmental decisionmakers—than of criminal activity

that posed a special threat to social well-being. Jd. at

1074-76. We emphasized that the determination of

whether particular predicate acts reflect “continuous”

criminal activity cannot be made in a vacuum, but must

take into account the inherent characteristics of the

situation in issue. Jd. at 1075.

This case presents the closest question yet, for the

predicate acts alleged here span a period of ten years and

can be grouped into several distinct “episodes’’ of

activity, each of which is arguably self-contained.

Indeed, the plaintiffs contend that these different

“episodes” of fraudulent activity reflect the existence of

at least four separate and distinct “schemes.” The first

such “scheme” is said to involve the 1977 transfer of

B&O’s non-rail assets to MAC and the subsequent

declaration of the dividend in MAC stock without

advance notice to the B&O debentureholders. The second

and third “‘schemes’’ involve the 1983 freezeouts of the

minority shareholders in two B&O subsidiaries, WMR

and WMC; the fourth centers around the current effort

to freeze out the minority shareholders in B&O itself. See

Appellant’s Brief at 5-7. The plaintiffs contend that the

existence of these separate ‘‘schemes’’ demonstrates the

continuity necessary to make out a RICO pattern.

A22

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

We disagree. Even assuming that the allegations made

here are legally sufficient to plead multiple acts of mail

fraud—an issue we do not decide—we are not persuaded

that the conduct thus alleged reveals sufficient

continuity to establish a pattern, as that concept has

been worked out in our cases. As the district court

noted—and the plaintiffs’ own complaint asserts

repeatedly*—each of these allegedly separate “‘schemes”’

or ‘‘episodes’’ of fraudulent activity was merely another

step toward the accomplishment of a single, limited goal:

getting rid of the outside minority interests in B&O.

There was in reality but a single “scheme” to inflict a

single basic injury. Here, as in HMK, the number of

predicate acts and the length of time over which they

occurred are more a reflection of the peculiar context in

which the activity occurred—a lengthy and bitter battle

for control of a large corporate entity—than of ongoing

criminal conduct whose scope and persistence poses a

special threat to social well-being. Virtually every action

taken by a controlling majority in the course of its

stewardship of a corporation is subject to challenge as

either mail or securities fraud. To hold indiscriminately

that proof of several such acts occurring over the course

of a period of years constitutes a RICO pattern would be

to make the statute’s extraordinary penalties available to

‘ virtually every disgruntled minority shareholder harmed

in the process. Such a result would not only have a

chilling effect on the transaction of legitimate corporate

business, but also sanction a use of the RICO statute

that we do not think Congress intended.

* See Joint Appendix 3A-4A; 7A; 35A.

A23

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

We do not, of course, mean to suggest that a single

ongoing scheme of racketeering activity can never

constitute a pattern when it occurs in the corporate

context. Indeed, one of the most obvious examples of a

RICO pattern—a scheme that involves setting up a

series of shell corporations, selling stock in them by

means of various false representations, and then

disappearing with the proceeds—occurs in the corporate

context. Such an open-ended scheme contemplating the

repeated infliction of independent economic injuries on

an indiscrimnate number of victims may well pose a

special threat to social well-being. We hold only that this

particular scheme, limited in scope to _ the

accomplishment of a single discrete objective—forcing

out the minority in a single corporate structure—does

not pose a sufficient threat of continuing criminal

activity to justify imposition of RICO’s extraordinary

penalties. Though the activity engendered by this

scheme was spread out over time, it wae undertaken

merely as a means to the accomplishment of that single

end, and there is nothing to suggest that it would have

continued for a moment longer than was necessary to

accomplish it. Viewed in context, the separate acts

emerge as no more deleterious than the multiple mailings

in furtherance of the single discrete transaction in

Zepkin. Such allegations of multiple preparatory acts

leading up to the infliction of a single basic injury are

simply not the stuff of which RICO patterns are made.

See, e.g., finding similar allegations insufficient to meet

Sedima’s continuity requirement, Medical Emergency

Serv. Assoc. v. Foulke, F.2d (7th Cir. Mar.

25, 1988) (multiple acts of mail fraud leading up to

infliction of single injury, the displacement of plaintiff as

A24

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

provider of emergency services); Marks v. Pannell Kerr -

Forster, 811 F.2d 1108, 1110-12 (7th Cir. 1987) (multiple

fraudulent acts designed to inflict single injury on single

victim); Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818

(7th Cir. 1987) (multiple fraudulent representations

leading up to formation of single contract and transfer of

single business opportunity); Torwest DBC, Inc. v. Dick,

810 F.2d 925, 928-29 (10th Cir. 1987) (allegations of

multiple fraudulent acts designed to permit corporate

insiders to recover illegal profits from sale of single piece

of property); Elliott v. Chicago Motor Club Ins., 809 F.2d

347, 349-50 (7th Cir. 1986) (multiple acts of mail fraud

designed to defraud plaintiff in relation to single

insurance claim); see also Montesano v. Seafirst Comm.

Corp., 818 F.2d 423, 426 (5th Cir. 1987) (Higginbotham,

J.) (suggesting similar analysis).

We wish to emphasize that by focusing on the ultimate

objective of the related predicate acts at issue, we are

not holding that it is necessary to show more than one

fraudulent ‘‘scheme”’ or criminal ‘“‘episode”’ to establish a

pattern. Such an approach is, in our judgment, utterly

indefensible after Sedima, for the RICO statute itself

contains no requirement of multiple ‘‘schemes” or

“episodes.”” Nor do we mean to suggest that related

predicate acts may always avoid RICO liability by the

‘“‘semantical game of generalizing the[ir] illegal

objective.”” See Montesano, 818 F.2d at 426. Quite

plainly, a scheme that contemplates the repeated

infliction of independent economic injuries—e.g., a series

of bank robberies or embezzlements—should not escape

characterization as a pattern simply because each

A25

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circ uit (1988).

criminal act shares the same general objective—the

robbing of banks or the embezzlement of funds. Schemes

such as these, which involve the repeated infliction of

independent economic injuries—and thus the reaping of

independent illegal benefits—are precisely the sort of

ongoing criminal activity to which Sedima’s continuity

requirement is addressed. See, e.g., Liquid Air Corp. uv.

Rogers, 834 F.2d 1297, 1303-05 (7th Cir. 1987)

(allegations that defendants mailed 19 different false

shipping invoices over period of seven months to

document shipments that were never made were

sufficient to satisfy continuity requirement, because each

false invoice was a separate fraud resulting in an

independent economic injury and concomitant illegal

benefit); Illinois Dept. of Revenue v. Phillips, 771 F.2d

312, 313 (7th Cir. 1985) (allegations that defendant

mailed nine separate fraudulent sales tax returns to the

state over a nine-month period were sufficient to

constitute pattern). We hold only that the objective of

the related predicate acts is a factor to be considered in

assessing the criminal dimension and degree. In this

case, that objective is sufficiently limited that we cannot

say the related predicate acts suggest ongoing criminal

activity of sufficient scope and persistence to pose a

special threat vo social well-being.

III

We turn next to Count III of the amended complaint,

which attempts to assert a claim for breach of fiduciary

duty under state law. Under Maryland law, a minority

shareholder who objects to the price offered him by the

majority in a §3-106 merger may elect instead to receive

A26

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

the fair value of his stock through the appraisal process

set forth in Md. Corps. & Ass’ns Code Ann. $§3-201 to

-213. Md. Corps. & Ass’ns Code Ann. $§3-106(d)(2). The

statute itself does not indicate whether this appraisal

proceeding is the exclusive remedy available to a

dissenting minority shareholder in a §3-106 merger.

Maryland’s highest court has not specifically addressed

this issue, but it has indicated that minority

shareholders may, under certain circumstances, obtain

equitable relief against similar ‘freezeout’’ maneuvers,

notwithstanding the existence of the statutory appraisal

remedy. See Lerner v. Lerner, 511 A.2d 501, 505-06 (Md.

1986); Homer v. Crown Cork & Seal Co., 141 A. 425, 432

(Md. 1928); see also Twenty Seven Trust v. Realty

Growth Investors, 533 F. Supp. 1028, 1034-36 (D. Md.

1982) (applying Maryland law). Drawing on these

precedents, Maryland’s intermediate appellate court has

recently held that dissenting minority shareholders

may, under certain limited circumstances, obtain equitable

relief against a §3-106 freezeout merger, despite the

existence of the statutory appraisal remedy. Walter

Schloss Assoc. v. The Chesapeake & Ohio Ry., No. 710,

Sept. Term 1977, slip op. at 14-15 (Md. Ct. Spec. App.

Jan. 20, 1988). While the Schloss decision is of course

not binding on us, we think it represents the best

available prediction of the position the Maryland Court

of Appeals would likely take on the issue. We therefore

assume, as did the district court, that Maryland law

permits a dissenting minority shareholder to obtain

equitable relief against a §3-106 freezeout merger, in

certain circumstances.

A27

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

Identifying the circumstances under which such relief

is available, however, is a much more difficult task. In

Homer, the Court of Appeals held that an allegation that

the price offered for minority shares was “grossly

inadequate” would not justify equitable relief because

such a claim could be fairly resolved in the statutory

appraisal proceeding. 141 A.2d at 432. Equitable relief

was warranted, the court held, only where there was

“fraud” on the part of the majority or the officers and

directors it controlled. Jd But the Homer court

recognized that allegations of “fraud’’ are often nothing

more than disagreements about methods of valuation,

which are more appropriately resolved in the statutory

appraisal proceeding. It therefore directed courts to view

allegations of fraud with suspicion and to deny equitable

relief “if, on consideration of all the allegations of the bill

of complaint, it appear[s] that the fundamental issue

thus made is not fraud, but a debatable controversy over

value.” Id. To take the case out of the appraisal statute,

the court held, the fraud must be “affirmatively shown.”

Id. Applying this careful scrutiny to the allegations of

fraud in the complaint before it, the court found them to

be in essence nothing more than a complaint about the

method by which the value of the minority shares was

calculated. Since this dispute could adequately be

resolved in a statutory appraisal proceeding, the court

found the allegations insufficient to state a claim for

equitable relief. Id. at 433-34.

Homer was decided in 1928, and the general body of

corporate law has changed a great deal in the intervening

years. During the 1970s, many courts held that minority

A28

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

shareholders could obtain equitable relief against

freezeout mergers upon a showing that the merger had

no legitimate ‘‘business purpose” other than to force out

the minority. See, e.g., Singer v. Magnavox Co., 380 A.2d

969, 980 (Del. 1977). In Weinberger v. UPO, ine., 457

A.2d 701 (Del. 1983), the Delaware Supreme Court

abandoned this “no independent business purpose’’ rule

and held that a minority shareholder could obtain

equitable relief against a freezeout only upon a showing

that the transaction did not meet the test of “entire

fairness.” “Entire fairness,’’ said the Delaware court,

meant both ‘‘fair dealing” and “fair price,” id. at 711; for

this reason, equitable relief might be appropriate not

only in cases of actual fraud, but also where the majority

had engaged in “‘misrepresentation, self-dealing, deliberate

waste of corporate assets, or gross and palpable

overreaching,” id. at 714. It is this broad “fairness”

exception to the exclusivity of the statutory appraisal

remedy, rather than the narrow “actual fraud’’ exception

recognized by the Maryland Court of Appeals in Homer,

that the plaintiffs urge us to apply in juding the

sufficiency of their complaint.

We decline to do so. Three years after Weinberger, the

Maryland Court of Appeals was asked to adopt its

“fairness” approach to minority freezeouts in an appeal

from the grant of a preliminary injunction against such a

merger. See Lerner, 511 A.2d at 511.‘ It specifically

‘While the court was asked to do so by a majority shareholder who

sought to avoid the business purpose doctrine, the court’s discussion

made clear that it was considering all aspects of the Weinberger rule.

See 511 A.2d at 511.

A29

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

declined to decide whether to do so, saying that such a

decision involved ‘“‘serious, substantial, difficult and

doubtful” issues that would require ‘more deliberate

investigation.” Id. At the same time, the Court of

Appeals specifically reaffirmed Homer's holding that

equitable relief was not available to a minority

shareholder when careful analysis of his complaint

revealed it to be nothing more than a complaint about

the adequacy of the price offered for his shares. Jd. at

506. Because the Weinberger issue was presented to the

Maryland court in the preliminary injunction context, its

refusal to adopt that doctrine cannot be taken as an

affirmative indication that it would not do so, upon

further reflection. Absent more authoritative guidance

from the state’s highest court, however, it is not for this

court, sitting in diversity, to extend state law in the

manner suggested. Accordingly, it is Homer's actual

fraud rule, rather than the Weinberger ‘‘general fairness”

test, that we apply in judging the vented of this

complaint.

Viewing the plaintiffs’ attempted allegations of

“fraud” with the suspicion mandated by Homer, and

under the stringent pleading requirement of Fed. R. Civ.

P. 9(b), we are convinced, as was the district court, that

they are not sufficient to state a claim for equitable relief

under existing Maryland law. Paragraphs 55-70 contain

various complaints about income and asset valuations

and methods of accounting, which are, as indicated

earlier, insufficient to warrant equitable relief under

Homer. Paragraph 71 alleges that the defendants

“concealed from the investing public material

A30

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

information concerning B&O in order to manipulate and

control the price ... of the B&O common stock.”

Specifically, paragraph 71a alleges that the defendants

failed to disclose B&O’s plans to sell one or more of its

short-line railroads; paragraph 71b that they failed to

disclose B&O’s projections of income for 1986 and 1987,

and that they waited until March of 1987 to disclose

B&O’s 1986 earnings, though the information was

available in January. None of these allegations is

sufficient to plead a case of fraud under Maryland law

and Fed. R. Civ. P. 9(b), for all of this information was

fully disclosed to the B&O shareholders in the notice of

merger, and there are no specific facts alleged that show

the failure to disclose it earlier affected the market price

of B&O’s stock or otherwise caused the plaintiffs injury.‘

Paragraph 72 alleges that the defendants concealed

until the merger was announced that Morgan Stanley,

which CSX retained as an “independent financial

advisor” to provide the appraisals of B&O’s common

stock used to calculate the cash-out price, had had

previous business dealings with CSX, including

underwriting CSX offerings and maintaining a trading

position in CSX stock. But there is no specific allegation

that these prior business dealings prevented Morgan

Stanley from exercising independent business judgment

in this case, and it is, in any event, undisputed that the

prior dealings were fully disclosed to the minority

* The plaintiffs’ conclusory allegations that the information concealed

was relevant to the market's valuation of the B&O stock, see {7 1a, is

insufficient to plead fraud under Rule %b).

A31

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

shareholders in the notice of merger. These conclusory

allegations of bias are simply insufficient to make out

the concrete case of fraud required by Homer.

In sum, we think a fair reading of the complaint as a

whole reveals the plaintiffs’ fundamental grievance to be

one of inadequate price, rather than fraudulent dealing.

Because the statutory appraisal remedy provides a

wholly adequate—and in these circumstances

exclusive—remedy for price inadequacy, we agree with

the district court that the third count of the complaint

fails to state a claim upon which relief can be granted.

We are bolstered in this conclusion by a recent decision

of the Maryland Court of Special Appeals in the parallel

state court litigation challenging this same merger. See

Walter J. Schloss Assoc. v. The Chesapeake & Ohio Ry.,

No. 710, Sept. Term 1977 (Md. Ct. Spec. App. Jan. 20,

1987). The plaintiffs in Schloss are represented by the

same counsel as the plaintiffs in this case, and the

allegations in their complaint are in all material respects

the same as those in the complaint now before us.* The

Maryland court found these allegations insufficient to

state a claim for equitable relief under Homer, and we

think the same analysis applies here.

IV

For the foregoing reasons, the judgment of dismissal is

affirmed.

AFFIRMED.

*We have considered carefully the differences between the two

complaints pointed out by the plaintiffs and find them to be

inconsequential.

A32

Appendix C—Opinion of the United States Court

of Appeals for the Fourth Circuit (1988).

CERTIFICATE OF SERVICE

I hereby certify that on the 23rd day of September,

1988, a true and correct copy of the foregoing Petition

for Certiorari was served by United States first-class

mail, postage prepaid, addressed to:

Richard Magid, Esquire

WHITEFORD, TAYLOR & PRESTON

1400 Union Trust Tower

Suite 1400

7 St. Paul Street

Baltimore, MD 21202

MICHAEL P. MALAKOFF

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