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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1989
- **Citation:** 492 U.S. 914

## Text

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Supreme Court, U.S.
88-558 FILED
SEP 24 198
N O. JOSEPH F. SPANIOL, JR,
: tek

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

-
ack

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_0834%3A1. Public record. Not legal advice.