Opposition Brief — Liberty National Bank & Trust Co. v. George

Supreme Court brief1985

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S4= 1 8 3 0 MAY 22 1985

ALEXANDER L. STEVASs

UEL=RKR

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1984

LIBERTY NATIONAL BANK & TRUST

COMPANY OF LOUISVILLE (f/d/b/a

UNITED KENTUCKY BANK, INC.) - - Petitioner

versas

KENNETH R. GEORGE and ALBERTA W.

GEORGE - - - . . Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

RICHARD FROCKT

(Counsel of Record)

CAROL J. CHRISMAN

BARNETT & ALAGIA

The Fifth Avenue Building

444 South Fifth Street

Louisville, Kentucky 40202

(502) 585-4131

Counsel for Petitioner

WESTERFIELD-BONTE CO., 619 W. KENTUCKY~-P.O. BOX 3251, LOUISVILLE, KY.

Mitta we a =

QUESTIONS PRESENTED'

1. Whether, under the full faith and credit provisions

of 28 U.S.C. §1738, a plaintiffs complaint filed in federal

court alleging violations of the Racketeer Influenced and

Corrupt Organizations Act (“RICO”) is barred by a prior

state court decision against such plaintiff, in a case in-

volving identical parties and the same claims, wherein the

state court considered and rejected, on the merits, each

and every allegation in the federal court complaint, and

as to which decision state law would grant preclusive and

final effect.

2. Whether all claims arising under RICO are ex-

clusively within the jurisdiction of the federal courts.

3. Whether recovery upon a civil claim for treble

damages under RICO requires that the plaintiff suffer

damages by reason of the defendant’s acquiring, maintain-

ing control of or an interest in, or conducting the affairs

of an “enterprise” through the commission of the statu-

torily proscribed offenses, as opposed to damages causally

connected only to the defendant’s commission of such

offenses.

4. Whether Congress intended to authorize civil suits

for treble damages under RICO in cases where the defend-

ants have never been convicted of any predicate crime

listed in the statute.

1The Court has granted certiorari to review Questions 3 and 4

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

1984), cert. granted __ U. S. __, 105 S. Ct. 901, (1985), Case No.

84-648, and Haroco v. American Nat. B. d& T. Co. of Chicago, 747

F. 2d 384 (7th Cir. 1984), cert. granted sub. nom. American Nat.

B. & T. Co. of Chicago v. Haroco, __ U. 8. __, 105 S. Ct. 902

(1985), Case No. 84-822.

LIST OF ALL PARTIES

The petitioner in this matter is Liberty National Bank

& Trust Company of Louisville (hereinafter referred to as

“Liberty”). Liberty is a national bank located in Louis-

ville, Kentucky. Its parent corporation is Liberty United

Bancorp, Ine. Liberty has no affiliates, and has no sub-

sidiaries other than wholly-owned subsidiaries,

On Deceinber 23, 1982, Liberty acquired and merged

with another bank which was its predecessor in interest

regarding this matter. This predecessor in interest was

United Kentucky Bank, Ine. (“UKB”). The petitioner in

this matter proceeded in the Kentucky state courts under

the name of United Kentucky Bank, Inc., together with its

then parent company United Kentucky, Inc., and Does 1-99

(stiil unspecified directors and employees of UKB and its

parent).

The respondents in this matter are Kenneth R. George

and Alberta W. George (sometimes hereinafter referred

to as “respondents” or “the Georges”), former Kentucky

residents.

lil

TABLE OF CONTENTS

QUESTIONS PRESENTED ....................... -

Bee GT MG UMUEEEED 6 ccc ccccccccccccsceseees ii

eer ee iii-iv

er v-iv

JUDGMENTS AND OPINIONS BELOW .......... 2

ee 2

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

STATEMENT OF THE CASE .................... 3 8

I. Proceedings and Disposition in the Kentucky

era ws 65660 these bse see ees 3- 7

II. Proceedings and Disposition in the Federal

CEM cin chk lap hecaeschenceesnies 7- 8

REASONS FOR GRANTING THE WRIT.......... 9-26

I. Proper Application of Preclusion Rules is Espe-

cially Important When a Federal Court Must

Determine the Effects of a Prior State Court

ela aes cketekd ev eens er sdaenees 10-16

A. The Sixth Cireuit’s Opinion Conflicts with

This Court’s Decisions Requiring a Substan-

tive Inquiry Into State Preclusion Law ..... 12-13

B. The Sixth Cireuit’s Opinion Fails to Apply the

Balancing Test Required by 28 U.S.C. §1738.13-15

C. It Is Imperative for Purposes of Comity and

Finality That the Sixth Cireuit’s Decision

ESET TOT PLULE TEE TTT E Ee 15-16

II, JURISDICTION OVER RICO CLAIMS IS AN

ISSUE OF GROWING NATIONWIDE CON-

NT AT uuu desu ss 4e4 poss Cpecveveeesess 16-19

ITI.

IV.

PAGE

DECISIONS OF SEVERAL CIRCUITS DI-

RECTLY CONFLICT AS TO THE TYPE OF

INJURY REQUIRED FOR RECOVERY ON A

eT ED 5 vad ak 0:3 dn daceede Gens cuashens 19-23

BECAUSE RICO PROVIDES REMEDIES

ONLY FOR CRIMINAL WRONGS, COURTS

ARE DIVIDED ON THE PROOF AND PRO.

CEDURES REQUIRED UNDE? THE STAT-

UTE’S PRIVATE CIVIL ACTION PROVI-

a irk ate 5 aed ooo bee Lede Rac aan 24-26

INU oa b's «k's 4 «da duh 4 d5s dod es kee cha ebae 27

SE Wier da bl td vak can ea end sacknata la-40a

ee I ea balsa Phe la— 6a

Sixth Cireuit Denial of Rehearing .............. 7a

SEG SRN CINE 6 0d Gack cnc eecanaduceexs 8a-20a

District Court Judgment ................-.000. 21a

Jefferson Circuit Court Summary Judgment... .22a-26a

Text of Relevant Statutes ..................... 27a-33a

be ee err rr

Kentucky Preclusion Rules .................... 7a

Refused Amendment to Respondents’ Complaint .38a—40a

TABLE OF AUTHORITIES

Cases: PAGE

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

OB 4 ae COREE) oo vk d cide twee ceussssadaciden 22

Bunker Ramo Corp. v. United States Business

Forms, Inc., 713 F. 2d 1272 (7th Cir. 1983)..... 24

Connelly v. Balkwill, 174 F. Supp. 49 (N.D. Ohio

1958), aff’d, 279 F. 2d 685 (6th Cir. 1960) ...... 14

County of Cook v. Midcon Corp., 574 F. Supp. 902

et BB errr rr re rr reer tr 19

Derish v. San Mateo-Burlingame Bd. of Realtors,

oe me be: Ls peer rrr 14

Dunn v. United States, 442 U.S. 100 (1979) ....... 24

Eliason Corp. v. Bureau of Saf. & Reg. of Mich.,

564 F. Supp. 1298 (W.D. Mich. 1983) .......... 13

England v. Coffey. 350 8. W. 2d 163 (Ky. 1961)... 18

Furman vy. Cirrito, 741 F. 2d 524 (2nd Cir. 1984).. 18

Greenview Trading Co. v. Hershman & Letcher, 473

ASG |S fF 2 UU Ure 19

Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473,

GER COREE on va kdciavesseaensnwanvseeae 17-18

Haroco v. American Nat. B. & T. Co. of Chicago,

747 F. 2d 384 (7th Cir. 1984), cert. granted sub.

nom. American Nat. B. & T. Co. of Chicago v.

Haroco, __ U. 8. __, 105 S. Ct. 902 (1985), Case

Be WE npn occuscanscotaniate i, 20, 21, 22, 24, 26

Hokama v. E. F. Hutton & Co., 566 F. Supp. 636

6G. De GA BD. ocd s0da ed cusses dense 19

Kaufman v. Schoenberg, 154 F. Supp. 64 (D. Del.

DOES | ok chad essinedcaccekeriese nee 14

Kremer vy. Chemical Construction Corp., 456 U. S.

461 (1982), reh’g denied, 458 U. S. 1132

5 PR ee PTE Peery 10, 13, 14, 15, 17

Luebke v. Marine Nat. Bank of Neenah, 567 F. Supp.

GRD CETL Wh. IGS 6s vndosncvcbskecenseees 14, 19

PAGE

Marrese v. Am. Academy of Orthopaedic Surgeons,

— U. 8S. —, — 8. Ct. —, 538 US.L.W. 4265

CRUG G, TOD o vd canicnvsdevacusetiiesnsias 10, 11

Nash County Bd. of Ed. v. Biltmore Co., 640 F. 2d

484 (4th Cir. 1981), cert. denied, 454 U. S. 878,

reh’g denied, 454 U.S. 1117 (1981) ............ 14,18

Nesglo, Inc. v. Chase Manhattan Bank, N.A., 562

F. Supp. 1029 (D. Puerto Rico 1983) .......... 14

Poe v. John Deere Co., 695 F. 2d 1103 (8th Cir.

DOMED scevuse 6s 00bsbee8 c4vksietil en 13

Red Fox v. Red For, 564 F. 2d 361 (9th Cir. 1977) 14

Schacht v. Brown, 711 F. 2d 1343 (7th Cir. 1983),

cert. denied, _ U. S. —, 104'S. Ct. 508 (1983).. 20

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

(2nd Cir. 1984), cert. granted —. U. S. __, 105

S. Ct. 901 (1985), Case No. 84-648. . .i, 19, 20, 24, 25, 26

USACO Coal Co. v. Carbomin Energy, Inc., 689

F’, 2d 94 (6th Cir. 1982) ..................000. 24

Wren v. Cooksey, 159 S. W. 1167 (Ky. 1913) ..... 13

Constitutional Provisions:

None

Statutes:

Title 18, United States Code, §1341 .............. 15

Title 18, United States Code, §1961 .............. 2, 22

Title 18, United States Code, (1962 .............. 22, 23

Title 18, United States Code, §1964 .............. 22, 22

Title 28, United States Code, 61254 .............. 2

Title 28, United States Code, §1738 ......... 9, 10, 11, 12,

15, 16, 27

Rules:

United States Supreme Court, Rule 17 ........... 2

No.

SUPREME COURT OF THE UNITED STATES

October Term, 1984

Liperty Natrona Bank & Trust

Company oF LovtsviLLe (f/d/b/a

Unrrep Kentucky Bank, Inc.) - - Petitioner

KENNETH R. Georce and ALBERTA

W.Grorce - - - - - £Respondents

PETITION FOR A WRIT OF CERTIORARI

TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Petitioner Liberty National Bank and Trust Com-

pany of Louisville respectfully requests that a writ of

certiorari issue to review the judgment of the United

States Court of Appeals for the Sixth Cireuit entered

January 22, 1985.

OPINIONS AND JUDGMENTS BELOW

The opinion of the Court of Appeals for the Sixth

Circuit is not yet reported but is contained in the

Appendix hereto at page la. The opinion of the

District Court for the Western District of Kentucky

is not reported but is contained in the Appendix hereto

at page 8a.

JURISDICTION

The judgment of the Court of Appeals for the Sixth

Cireuit was entered on January 22, 1985, and _ peti-

tioner’s petition for rehearing was denied by that court

on February 21, 1985. The jurisdiction of this Court is

invoked pursuant to 28 U.S.C. §1254(1) and Supreme

Court Rule 17.

STATUTORY PROVISIONS INVOLVED

The relevant provisions of the Racketeer Influenced

and Corrupt Organizations Act (‘‘RICO’’), Title [X

of the Organized Crime Control Act of 1970, as

amended, 18 U.S.C. §§1961-1968 are set forth in the

Appendix hereto at page 27a, as are the provisions of

the other statutes listed in the Table of Authorities.

STATEMENT OF THE CASE

This petition for a writ of certiorari to the Sixth

Circuit is based on the outcome of two separate but

duplicative cases, one in the state courts of Kentucky,

and one in the federal courts of the Sixth Circuit. The

first judgment in Liberty’s favor was rendered in the

Cireuit Court of Jefferson County, Kentucky in late

1982. Since then, that judgment has run the full course

of appellate review in the Kentucky courts. Similarly,

the dismissal of the federal court case, which was based

on the preclusive effect of the state court judgment, has

run the full course of appellate review in the federal

system, except for this Court.

Recently, the Georges filed two petitions for writs

of certiorari from this Court. Their petition for a

writ to the Kentucky Court of Appeals was denied

April 1, 1985, and their petition for a writ to the Sixth

Cireuit Court of Appeals was denied April 15, 1985.

Presented below is a narrative of the proceedings

in the Kentucky courts, followed by a narrative of the

proceedings in the federal courts. Also attached in the

Appendix at page 34a is a chronological chart of pro-

ceedings as they occurred in both jurisdictions.

I. Proceedings and Disposition in the Kentucky Courts.

The state court proceedings began in the Jefferson

County Cireuit Court on October 27, 1981, when Lib-

erty filed its complaint against the Georges. This

state court suit was an action to collect in excess of

$2,000,000 loaned to the Georges by Liberty, and to

foreclose on collateral securing such sum,

On January 11, 1982, the Georges filed this action

(including their RICO claims) against Liberty in the

U. S. District Court for the Western District of Ken-

tucky, and also filed a petition for removal which re-

moved the Jefferson Circuit Court proceedings to the

same U.S. District Court. The Georges then filed a

perfunctory answer in the federal court action com-

menced by the removal. The U. S. District Court

promptly remanded the state court proceeding back to

the Jefferson Circuit Court, there being at that time,

no jurisdictional basis for removal (i.e., incomplete

diversity and no federal question).

Now back in state court, the Georges filed their

‘‘supplemental answer’’ to Liberty’s complaint on

March 1, 1982. The state court answer expressly in-

corporated all allegations of their January 11, 1982

complaint (including the RICO claims) by which the

Georges initiated this separate federal court action

against Liberty.

The state court supplemental answer contained

defenses and counterclaims which were subsequently

litigated in the state court by the Georges and Liberty.

These defenses primarily challenged the validity of

Liberty’s prime rate lending practices. The supple-

mental answer accused Liberty of breach of contract,

breach of fiduciary duty, and fraud (including mail

fraud as a predicate to a RICO action) based on alle-

gations that the Georges were charged Liberty's pub-

lished prime interest rate at the same time other bor-

rowers were allowed to borrow money from Liberty

based on a lower prime rate. In addition, the Georges

claimed that Liberty’s prime interest rate was illusory,

since Liberty had discretion to move it up or down, and

therefore, unenforceable.

The Georges’ supplemental answer also challenged

Liberty’s use of the 365/360 method of calculating in-

terest —a method in which interest for one quarter,

one half or three quarters of a year is calculated by

dividing the actual number of days by 90, 180 or 270,

round numbers used for ease of calculation. The

Georges likewise claimed that use of the 365/360

method of calculation constituted a breach of contract,

breach of fiduciary duty and fraud.

After the filing of the supplemental answer on

March 1, 1982, the state court case entered a period

during which both sides took extensive discovery, in-

ciuding interrogatories, production of documents, and

depositions. The discovery was by agreement to be

used in either the state or federal case.

On August 20, 1982, Liberty filed in the state court

an extensive motion for summary judgment supported

by an affidavit from a Liberty loan officer explaining

how Liberty established and changed its prime rate.

The trial court heard arguments of counsel regarding

summary Judgment on two occasions—October 11, 1982

and October 21, 1982.

Summary judgment for Liberty was entered on

October 25, 1982. (The judgment is attached in the

Appendix at page 22a). The judgment held that the

promissory notes were valid and collectible and that

Liberty was entitled to interest on the notes calculated

according to Liberty’s published prime rate. The

judgment held against Liberty only on the limited

issue of the 365/360 method of interest calculation,

stating that interest should have been calculated on a

365/365 basis, and therefore, the Georges were entitled

to an interest credit.

On November 4, 1982, the Georges filed in the trial

court a motion to alter, amend or vacate the summary

judgment, which motion was overruled in May, 1983.

The motion was held in abeyance for approximately six

months due to the Georges’ having filed bankruptey in

Tampa, Florida, which bankruptcy was subsequently

transferred to the U. 8. Bankruptcy Court for the

Western District of Kentucky.

The Georges then appealed to the Kentucky Court

of Appeals. That court issued an opinion on February

24, 1984, affirming in part and reversing in part. The

Court of Appeals reversed and remanded the case on

the limited issue of the manner in which the interest

eredit was calculated. All other aspects of the sum-

mary judgment for Liberty were fully affirmed by the

appellate court.

Subsequently, the Georges filed two more requests

for review in the Kentucky appellate courts. The first

was a petition for a rehearing filed in the Kentucky

Court of Appeals. On July 18, 1984, after the petition

for rehearing was denied, the Georges then filed a

motion for discretionary review in the Kentucky Su-

preme Court. Finally, the Kentucky Supreme Court

entered an order on November 8, 1984 denying the

Georges’ motion for discretionary review, and the

Georges’ state court remedies were thus exhausted. A

subsequent petition to this Court for a writ of cer-

tiorari to the Kentucky Court of Appeals was also

denied.

II. Proceedings and Disposition in the Federal Courts.

On January 11, 1982, after filing of the state court

action, the Georges filed the complaint in the instant

case in the U. S. District Court for the Western Dis-

trict of Kentucky, alleging breach of contract, breach

of fiduciary duty, fraud, and RICO/mail fraud claims.

Jurisdiction was invoked on the basis of 28 U.S.C.

§ 1331 due to the RICO claim and of 28 U.S.C. § 1332

due to the Florida domicile of the Georges and Ken-

tucky domicile of Liberty.

Except for the Georges’ filing their ‘‘first amended

complaint,’’ which by its terms was intended only to

‘‘restate and clarify’’ the original complaint, on June

22, 1982, little action occurred in the district court

ease until mid-1983. On June 13, 1983, Liberty filed its

motion to dismiss the complaint on the grounds of res

judicata and collateral estoppel based on the state

court judgment. The dismissal was granted September

30, 1983, subject to the case’s being reopened if the

state’s summary judgment were overturned by a Ken-

tucky appellate court. (The district court’s opinion is

included in the Appendix hereto at page 8a). Shortly

thereafter, the Georges appealed to the Sixth Circuit.

While the Kentucky state court appeals were in

process, the issues were fully briefed by both parties

in the Sixth Cireuit. That court postponed its decision

until after the Kentucky Supreme Court denied the

Georges’ petition for discretionary review of the Ken-

tucky Court of Appeals affirmance. On January 22,

1985, the Sixth Circuit affirmed the District Court’s

dismissal on the basis of res judicata and collateral

estoppel established by the state court summary judg-

ment, with one exception: the issue of fraudulent in-

ducement (as opposed to fraud in performance) was

held not to have been ‘‘actually litigated’” in the Ken-

tucky courts, and so not precluded by collateral es-

toppel as a basis for a RICO claim. That single issue

was remanded to the District Court for trial. In all

other respects, the dismissal was upheld.

2Although fraud in general had been part of the Georges’

claims from the beginning, their pleading of fraudulent induce-

ment in particular was later offered by the Georges as an amend-

ment to their defenses and counterclaims in the Jefferson Circuit

Yourt. This amendment was offered on October 21, 1982, the date

of the second hearing on Liberty’s summary judgment motion, and

was immediately denied. Not only was this amendment offered a

whole year after the case commenced, but it was offered in viola-

tion of an agreement by the Georges with the Jefferson Circuit

Court, whereby the Georges were required to consider the pleadings

closed as a condition to the court’s setting aside a default judgment

previously rendered against them as a sanction for failure to com-

ply with appropriate diseovery orders. (This refused amendment

is included in the Appendix hereto at page 38a.)

REASONS FOR GRANTING THE WRIT

This case presents basically two issues concerning

fundamental policies of national jurisprudence. The

first concerns the conflict between, on one hand, the

principles of preclusion embodied in the full faith and

credit provisions of 28 U.S.C. § 1738, and, on the other,

exclusive federal jurisdiction to decide cases under a

particular federal statute. How best to resolve the

conflict between these two important public policies

has been in some degree decided by this Court on pre-

vious occasions. However, the unique circumstances of

this case require further consideration of the issue in

order to avoid not only repetitive litigation but also

unnecessary conflict between state and federal courts.

The second issue concerns the proper interpretation

of the Racketeer Influenced and Corrupt Organizations

Act (‘‘RICO’’), a statute which, although intended to

reduce the acquisition and infiltration of legitimate

businesses by criminal elements, has recently engen-

dered volumes of lawsuits concerning no more than

everyday business disputes which would ordinarily be

resolved in state court. This case presents several un-

answered questions concerning jurisdiction over RICO

claims and the scope of the statute itself, which, having

resulted in material conflicts among the Cireuits and

between the Circuits and state high courts, should be

resolved.

I. Proper Application of Preclusion Rules Is Especially

Important When a Federal Court Must Determine the

Effects of a Prior State Court Decision.

It is axiomatic that at some point there must be an

end to litigation. The age old rules of preclusion,

which forbid relitigation in one court of claims and

issues already decided in another court, have been uni-

versally adopted to fulfill that purpose. Innumerable

eases have acknowledged the importance of rules pre-

cluding relitigation of questions already decided, and

refined the principles thereof to the point where little

disagreement remains as to the basic requirements of

the most commonly cited preclusion rules, res judicata

(or ‘claim preclusion’’) and collateral estoppel (or

‘‘issue preclusion’’).

Because our court system is intentionally bifur-

cated, preclusion rules are particularly important with

respect to the interplay of state and federal courts.

This principle is embodied in 28 U.S.C. § 1738, which

provides that judicial proceedings of any state shall

have ‘‘the same full faith and credit in every court

within the United States . . . as they have by law

or usage in the courts of such state from which they are

taken . . .’’ This statute requires federal courts to

respect and abide by the prior decisions of state courts,

even on federal questions. Marrese v. Am. Academy

of Orthopaedic Surgeons, — U. S. —, — 8S. Ot. —,

53 U.S.L.W. 4265 (March 4, 1985) ; Kremer v. Chemi-

cal Construction Corp., 456 U. S. 461 (1982), reh’g

denied, 458 U. S. 1133 (1982). The statute itself con-

tains no express exceptions; by its terms alone, § 1738

appears to apply to all prior decisions of state courts.

However, a conflict arises when a prior state court

has ruled on a claim within the exclusive jurisdiction

of federal courts, because the state court is deemed to

be without jurisdiction over the federal cause of action.

Marrese, supra, 53 U.S.L.W. at 4267. Nevertheless, the

preclusion principles of § 1738 will not be subordinated

to the exclusive jurisdiction issue except on rare oe-

casions where the policies and intent of Congress un-

derlying the exclusively federal question are deemed to

be more important than the principles of comity, effi-

ciency, and finality underlying § 1738. The most com-

mon justification for this exception is that the federal

statute provides more or different remedies than those

obtainable in the state action. Id. Even so, this narrow

exception to the finality of judgments has been further

limited by decisions of this Court requiring that reso-

lution of the preclusion/ jurisdiction conflict be based

on two considerations: first, an inquiry into state pre-

clusion law to determine whether the subsequent claim

would be barred by state law, and second, a balancing

of the purposes of § 1738 versus the exclusive federal

statute involved. Id.

The Sixth Cireuit’s decision requiring retrial in

federal court of the issue of fraudulent inducement is

based on a misunderstanding of the foregoing preclu-

sion rules and the unique balancing of interests which

the court must undertake in the context of exclusive

federal jurisdiction. The opinion pays lip service to

the full faith and credit requirements of 28 U.S.C.

§ 1738, and then acknowledges that state preclusion

rules control, reciting Kentucky’s general rules regard-

ing the specific elements of res judicata and collateral

estoppel. With respect to the fraudulent inducement

issue, the Sixth Cireuit summarily held that res judi-

eata was not applicable because the Kentucky court

lacked jurisdiction over the RICO claim, and that col-

lateral estoppel was not applicable because the issue

was not ‘‘actually adjudicated.’* The Sixth Circuit

totally failed to recognize, as this Court and other fed-

eral courts have done (including the district court in

this case) that such a narrow construction of state

preclusion rules is insufficient and inappropriate in

the present context. Section 1738 cannot be overruled

without a thorough inquiry into the jurisdictional

policy with which it conflicts, and into the state law by

which the federal court must be guided.

A. The Sixth Circuit’s Opinion Conflicts with This Court’s

Decisions Requiring a Substantive Inquiry into State

Preclusion Law.

There can be no doubt that the claim in issue would

be precluded in a second Kentucky state action, re-

gardless of whether RICO claims are under exclusive

federal jurisdiction. Clearly, the Jefferson Circuit

Court had jurisdiction over the fraudulent inducement

claim, a simple matter of state common law. And

under Kentucky’s Rules of Civil Procedure (essen-

tially identical to the Federal Rules), failure to join

that claim in the first action (or as in this ease, inability

3These rules match those of most jurisdictions and are set

forth in the Appendix hereto at page 37a.

4It was offered as an eleventh hour amendment to the Georges’

defenses and counterclaims which was disallowed by the state court

as contrary to a previous court order. See footnote 2 supra.

to join it as a court-imposed sanction) bars it per-

manently. England v. Coffey, 350 S. W. 2d 163 (Ky.

1961). Furthermore, the Kentucky court’s refusal to

permit the fraudulent inducement amendment to the

pleadings was a decision on the merits under Kentucky

law. Wren v. Cooksey, 159 S. W. 1167 (Ky. 1913) ; see

also Poe v. John Deere Co., 695 F. 2d 1103 (8th Cir.

1982) ; Eliason Corp. v. Bureau of Saf. and Reg. of

Mich., 564 F. Supp. 1298 (W.D. Mich. 1983).

The district court in this case was completely cor-

rect in holding that the state court’s specifie finding of

no intent to defraud is absolutely conclusive on the

issue of mail fraud, and thus RICO. (See Appendix

at 18a). There is no question that the Jefferson Circuit

Court’s disposition of the fraudulent inducement issue

was intended to be, and in another Kentucky court

would be, absolutely final.

B. The Sixth Circuit Opinion Fails to Apply the Balancing

Test Required by 28 U.S.C. $1738

In Kremer v. Chemical Construction Corp., 456

U. 8. 461, supra, this Court considered the preclusive

effect of a prior state court judgment in a case where

the parties, transactions, rights violated, and legal

standards were all the same, even though the statutory

basis for recovery was a state statute (an anti-discrim-

ination in employment law) in the state court action,

and a federal statute (Title VII of the Civil Rights

Act of 1964) in the federal court action. Because ele-

ments legally necessary to recovery under the federal

claim had already been adjudicated in a state adminis-

trative action and later affirmed by a New York Ap-

pellate Division court, and because the parties, trans-

actions, and alleged wrongful acts were the same, this

Court affirmed the trial court’s dismissal of the federal

action.

One signal aspect of the Kremer case is that this

Court’s opinion spoke primarily in general terms

of preclusion, without significant reference to the more

specific theories of res judicata and collateral estoppel.*

This more general mode of expression logically derives

from the Court’s determination that deciding whether

Title VII cases are within the exclusive jurisdiction of

federal courts was not required, in which case the

technical differences between the two theories were not

dispositive. In any event, Kremer and cases like it®

indicate that preclusion is not by any means wholly

dependent on jurisdiction ; rather, in each case the pur-

poses underlying preclusion and exclusive jurisdiction

must both be carefully considered.

The decision of the Sixth Cireuit in this case sub-

stantially undermines the important policy codified in

‘The District Court in Kremer had found the matters to be

res judicata.

®See, e.g., Derish v. San Mateo-Burlingame Bd. of Realtors,

724 F. 2d 1347 (9th Cir. 1983) and Nash County Bd. of Ed. v.

Biltmore Co., 640 F. 2d 484 (4th Cir. 1981), cert. denied, 454 U. S.

878, reh’g denied, 454 U. S. 1117 (1981) (antitrust laws); Red

Foz v. Red Foz, 564 F. 2d 361 (9th Cir. 1977) (Indian Civil Rights

Act) ; Luebke v. Marine Nat. Bank of Neenah, 567 F. Supp. 1460

(E. D. Wis. 1983) (RICO) ; Nesglo, Inc. v. Chase Manhattan Bank,

N.A., 562 F. Supp. 1029 (D. Puerto Rico 1983) (Tie-in Amend-

ments to Bank Holding Company Act of 1970) ; Connelly v. Balk-

will, 174 F. Supp. 49 (N. D. Ohio 1959), aff’d., 279 F. 2d 685 (6th

Cir. 1960) and Kaufman v. Schoenberg, 154 F. Supp. 64 (D. Del.

1954) (Securities Exchange Act violations).

§1738 and explained in Kremer, supra, particularly

where, as here, the federal statute presumed to grant

exclusive federal jurisdiction (i.e., RICO) is fre-

quently predicated on common business disputes ordi-

narily resolved by state law. The decision also fails to

consider that in cases such as these, the technical rules

of res judicata and collateral estoppel are supplemented

by broader preclusion principles necessarily compatible

with the requirements of §1738. But most importantly,

the Sixth Circuit’s neglect of the special considerations

surrounding preclusion rules in the context of exclusive

federal jurisdiction hes put in doubt the finality of

every state court decision concerning ordinary fraud

which might conceivably form the predicate to a RICO

action.

C. It Is Imperative for Purposes of Comity and Finality

That the Sixth Circuit’s Decision Be Reviewed.

Nothing is more indicative of the Sixth Circuit’s

failure in this case to give due consideration to appli-

cable preclusion rules than its holding that the issue of

fraudulent inducement could support a RICO claim,

when the Georges themselves never made such an alle-

gation in their federal court RICO complaint. The

only predicate alleged for their RICO claims was mail

fraud (18 U.S.C. §1341) based on Liberty’s mailing of

interest rate changes and payment notices. The only

basis for fraudulent inducement set forth in their of-

fered amendment (see Appendix, page 38a) to their

state court defenses and counterclaims was a bank

officer’s oral statement regarding expectations of fu-

ture changes in the prime rate. Neither the amendment

offered in state court nor the Georges’ complaint in

federal court asserted a connection between alleged

fraudulent inducement and mail fraud or any other of

the underlying crimes which must be found for RICO

to apply. Considering the overabundance of RICO

claims today, it is indeed puzzling that the Sixth Cir-

cuit would feel compelled to find a new claim where

none was previously alleged.

The Sixth Cirecuit’s remand of the fraudulent in-

ducement issue contravenes every logical and equitable

basis for application of the rules of preclusion which

have governed in the courts of this nation since its

birth. To permit this decision to stand will be to open

up the federal district courts to a flood of unnecessary

relitigation, not only under RICO but also under

every other federal statute over which federal courts

have exclusive jurisdiction, and will threaten the

finality of a multitude of state court judgments, in

patent contravention of the full faith and credit re-

quirements of 28 U.S.C. §1738. For these reasons,

petitioner respectfully requests that this Court grant

certiorari to resolve the substantial federal/state con-

flict which it creates.

II. Jurisdiction Over RICO Claims Is an Issue of

Growing Nationwide Concern.

Closely allied to the issue of preclusion rules appli-

cable by virtue of a prior state court judgment on a

RICO claim is the issue of whether federal courts have

exclusive jurisdiction over such claims. Both the spirit

and letter of 28 U.S.C. §1738 suggest that preclusion

rules should usually apply regardless of the jurisdic-

tion question. However, if state courts have conecur-

rent jurisdiction over RICO claims, the preclusion

issue presented in this case and discussed above will be

automatically resolved, because the question arises only

in the context of exclusive federal jurisdiction.

As noted previously, this Court has on at least one

prior occasion specifically avoided deciding an ex-

elusive jurisdiction question in favor of finding res

judicata without reference to the jurisdictional issue.

(Kremer v. Chemical Construction Corp., 456 U.S. 461,

supra), concerning discrimination under Title VII of

the Civil Rights Act of 1964.) Nevertheless, Liberty

submits that the issue as it concerns RICO is one of

tremendous importance, particularly if resolution of

the preclusion issue discussed above is left unsettled,

or results in a rule of law not favoring preclusion.

Considering the present multitude of RICO cases,

many of which are based on common law fraud claims,

failure to resolve this issue of exclusive federal juris-

diction may well result in substantial and unnecessary

relitigation in federal ccurt of volumes of cases previ-

ously tried in state courts. Although a burdensome

caseload in federal court is not by itself any justifica-

tion for determining that state courts have concurrent

jurisdiction over RICO, it is nevertheless an important

factor in determining the intended scope and applica-

tion of the RICO statute.

The general rule is that state courts are presumed

to have concurrent jurisdiction over federal statutes

unless the statute expressly states otherwise. Gulf

Offshore Co. vy. Mobil Ou Corp., 453 U. 8, 473, 478

(1981). The RICO statute itself says nothing about ex-

elusive federal jurisdiction. To date, it appears that

only one major area of federal law, antitrust, has been

held to be within exclusive federal jurisdiction absent

an express provision in the statutes. Although the

remedies provided by the RICO Act are modelled after

the antitrust statutes, the two laws have widely di-

vergent purposes, antitrust to promote competition

among legitimate businesses, and RICO to shut down

businesses which are criminal enterprises or to purge

them of criminal elements. See, e.g., Furman v. Cirrito,

741 F. 2d 524 (2nd Cir. 1984). Thus, the RICO Act

need not be interpreted in the same manner as the

antitrust laws with respect to jurisdiction.

In addition, the factors usually cited to support

exclusive jurisdiction, such as (a) uniform interpreta-

tion, (b) federal judges’ expertise in federal law, (c)

the benefits of the Federal Rules of Civil Procedure,

and (d) hospitality to enforcement of the claims, Nash

County Bd. of Ed. v. Biltmore Co., 640 F. 2d 484 (4th

Cir. 1981), are not present here. On the contrary, fed-

eral court interpretations of RICO are tremendously

inconsistent, and the predicate acts required are often

state common law claims with which state court judges

are naturally familiar. In addition, Kentucky has es-

sentially the same procedural rules, and the state no

doubt has as much interest as the federal government

in eliminating the evils to which RICO was intended

to apply.

The exclusive jurisdiction issue by itself has not yet

resulted in a conflict between circuits. Nevertheless,

it has caused two federal district courts in the same

circuit to take diametrically opposite positions, one

holding that jurisdiction over RICO claims is exclu-

sively federal, and the other holding that it is not.

County of Cook v. Midcon Corp., 574 F. Supp. 902

(N.D. Tl. 1983) ; Luebke v. Marine Nat. Bank of Nee-

nah, 567 F. Supp. 1460 (E.D. Wis. 1983). In what are

apparently the only other cases involving this question,

the Sixth Circuit in this case has impliedly agreed with

Cook, and a New York state court has followed Luebke.

Greenview Trading Co. v. Hershman & Leicher, 473

N.Y.S. 2d 722 (Sup. 1984). It is only a matter of time

before the disagreement reaches the circuit court level.

Therefore, unless this Court finds the scope of RICO

to be as limited as the Second Circuit has in the Sedima

case, supra,’ it is important that the issue of exclusive

federal jurisdiction over RICO be resolved.

III. Decisions of Several Circuits Directly Conflict as

to the Type of Injury Required for Recovery on

a RICO Claim.

There is little controversy regarding the primary

purposes of the RICO statute, to address the acquisi-

tion and infiltration of legitimate businesses by ecrim-

inal elements. However, the reported cases diverge

radically on the elements required to recover on a

civil RICO claim, from limited interpretations which

require that the activities in question involve what is

clearly ‘‘organized crime,’’* to much more liberal in-

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

1984), cert. grantee __ U. S. —_, 105 8. Ct. 901 (1985).

8See, e.g., Hokama v. E. F, Hutton & Co., 566 F. Supp. 636,

643 (C. D. Cal. 1983).

terpretations which find the statute purposefully en-

compassing numerous ‘‘garden variety’? commercial

transactions in order to avoid missing a few criminal

ones.”

In any event, there is little doubt at this point that

the phenomenal lack of consensus among federal courts,

including several circuits, on the elemental require-

ments for recovery under RICO presents questions

which beg for resolution by this Court.

<P TRAN EN MT I ——

Among the issues already widely considered are

(1) whether RICO requires some nexus between the

challenged activity and ‘‘organized crime’’, (2)

whether plaintiffs must allege a ‘‘competitive’’ injury,

(3) whether there must be criminal convictions for the

statute’s underlying predicate acts to sustain a RICO

claim, and (4) whether the damage alleged must arise

from a ‘‘racketeering’’ type injury and not simply

injury casually connected only to the predicate acts.

At present the most controversial appears to be the

‘‘racketeering injury’’ issue which is presented in the

instant case. This Court is currently considering two

other cases involving that question: Sedima, S.P.R.L.

v. Imrex Co., Inc., 741 F. 2d 482 (2nd Cir. 1984), cert.

granted — U. 8. —, 105 S. Ct. 901 (1985), Case No.

84-648, and Haroco v. American Nat. Bank & Trust Co.

of Chicago, 747 F. 2d 384 (7th Cir. 1984), cert. granted

sub. nom. American Nat. Bank & Trust Co. of Chicago

v. Haroco, __ U. 8. _, 105 S. Ct. 902 (1985), Case No.

84-822. Since in this case the respondents’ pleadings —

*See, e.g., Schacht v. Brown, 711 F. 2d 1343 (7th Cir. 1983),

cert. denied, __ U. S. __, 104 8S. Ct. 508, (1983).

claim damage from no more than fraudulent induce-

ment,’® a finding by this Court that special injury is

required should dispose of the case as a matter of law.

The instant case involves facts astonishingly simi-

lar to those in the Haroco case. Like American Na-

tional Bank in Haroco, Liberty has been charged with

RICO violations stemming from the alleged improper

setting and charging of its prime interest rate, and use

of the mails to notify and bill the respondents. By

tagging a RICO claim to their common law claims of

fraud, breach of contract and breach of fiduciary duty,

respondents have succeeded (like their counterparts in

Haroco) in turning a simple state foreclosure action

into a federal case, subjecting Liberty not only to the

possibility of treble damages and the stigma of being

found guilty of criminal fraud, but also to a trial de

novo in federal court, after the transactions involved

have already been repeatedly litigated in three Ken-

tucky courts, two federal courts, and two bankruptcy

courts. By no stretch of the imagination can it be

presumed that this result was intended by Congress in

enacting the RICO statute.

This case and the Haroco case may be described as

representative not only of several cases now pending,

but also of myriad cases which will no doubt arise in

the future unless the scope of the RICO statute is

properly construed by this Court to correspond with

the purposes for which the statute was enacted. In-

terestingly, while interpreting RICO quite broadly,

10Liberty again notes that respondents’ refused amendment

which pleaded fraudulent inducement makes no mention of RICO.

the Seventh Circuit Court in Haroco nevertheless quite

aptly confirmed the point here presented, 1.e., that it

“‘does not seem at all likely that Congress anticipated

the application of civil RICO to improperly calculated

interest charges by a commercial bank.’’ 747 F. 2d at

399.

Whether one labels the instant issue as a ‘‘racke-

teering injury’’ requirement, as in Haroco, or more

generally as a requirement of ‘‘injury of the type the

RICO statute was intended to prohibit,’’ is really of no

moment. ‘There is no need to delineate the precise

scope of the statute in minute detail. In view of the

well settled purposes of RICO, however, there is a

patent need to restrict the application of the statute

more closely to those transactions which are related to

its purposes.

The terms of the RICO statute itself certainly indi-

cate that more than just the predicate criminal acts are

required. The right of civil action provided in 18

U.S.C. §1964 permits private individuals to bring suit

only for injuries ‘‘by reason of a violation of Section

1962.’’"* Section 1962 does not list the predicate crimes ;

rather it describes the requisite ‘‘pattern’’ of racke-

teering activity and the undertaking of such activity to

‘facquire’’, ‘‘maintain’’, or ‘‘conduct’’ an ‘‘interprise’’ :

through such pattern of activity. Section 1964 makes

no direct reference to the predicate crimes; they are

listed in Section 1961, which is reached only by refer-

11C0f, Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U. S.

477 (1977) (in re antitrust laws, ‘‘by reason of’’ requires special

antitrust injury).

ence from Section 1962, not Section 1964. This ar-

rangement strongly suggests that civil lability under

RICO requires not only commission of two or more

predicate acts, but also a certain type of relationship

between the predicate acts and the enterprise. It is

only through this ‘‘pattern’’ and its relationship with

the enterprise that the characteristics of ‘‘organized

crime’”’ appear, and RICO liability should arise.

Some courts have struggled to define this special

‘RICO injury’? more precisely, while others have

found it easier to deny that one is required. Neverthe-

less, that a statute is difficult to construe is no justifi-

cation for failing to do so, particularly where such in-

action creates the likelihood of massive litigation im-

posing substantial penalties on activities for which

adequate common law and other statutory remedies al-

ready exist, and which are clearly not within the pur-

view of the RICO statute.

Considering the already vast array of different

interpretations of RICO, the necessity for interpretive

guidelines by this Court is apparent. Otherwise, the

federal courts will continue to be deluged with simple

commercial contract and tort cases renamed ‘‘*RICO

violations’’, and the decisions rendered will continue to

ride off in all directions. Without such clarification,

RICO will centinue to inject uncertainty into ordinary

commercial transactions and create a trend of forum

shopping to take advantage of the variant interpreta-

tions. For these reasons, the present situation must

not be permitted to continue.

IV. Although RICO Clearly Provides Remedies Only for

Criminal Wrongs, Courts Are Divided on the Proof

and Procedures Required Under the Statute’s Private

Civil Action Provisions.

‘ven more basic that the ‘‘racketeering injury”’

q .. tion is the issue of the requirements in a private

RICO action for establishing the necessary predicate

crimes. If, as Liberty contends, a successful RICO

action requires conviction of the predicate crimes, then

this case will be resolved as a matter of law.

On this issue, the circuits have likewise taken polar

positions, the Second Circuit holding that a civil RICO

recovery requires conviction of a predicate crime,” the

Sixth and Seventh Circuits holding that it does not.’*

However, it is clear from the face of the statute, and

even the Second and Seventh Circuits agree,’* that the

wrongful conduct which RICO can remedy must be

criminal. More specifically, RICO does not remedy

civil wrongs; it merely provides a private civil remedy

for criminal wrongs. As a criminal statute then, due

process requires that RICO be strictly construed. See,

e.g., Dunn v. United States, 442 U.S. 100, 112 (1979).

However, there is also authority requiring that the

RICO statute requires ‘‘liberal construction’? (Title

IX, Pub. L. 91-452, Section 904(a)), but if this means

128edima, supra, at p. 496. :

13U§ACO Coal Co. v. Carbomin Energy, Inc., 689 F. 2d 94, 95

n. 1 (6th Cir. 1982) ; Bunker Ramo Corp. v. United States Business

Forms, Inc., 713 F. 2d 1272, 1287 (7th Cir. 1983). The Sixth Cir-

cuit’s remand in this ease, there being no criminal convictions, also

impliedly denies that RICO requires such convictions.

14Sedima, supra at 501; Haroco, supra, at 404.

the predicate crimes must be liberally construed also,

serious questions concerning the resulting lack of due

process guaranteed to criminal defendants could render

RICO constitutionally infirm.

Additional inconsistencies are created where, as in

this case, a civil action is presumably'’ predicated on

mail fraud. It is evident that there is no private right

of action for mail fraud, yet if RICO elaims based on

merely two acts of mail fraud can be sustained without

a prior criminal conviction, then RICO plaintiffs will

have succeeded in doing indirectly what they could not

do directly. Constitutional considerations and simple

logic both dictate that a RICO defendant cannot be

held liable for a criminal act and subjected to punitive

penalties without the standards of proof and other con-

stitutional safeguards of criminal procedure.

Among these safeguards is the use of prosecutorial

discretion in criminal cases, prosecutors being gener-

ally inclined to maximize benefits by pursuing only the

more egregious violations. With civil RICO, however,

private plaintiffs have just the opposite incentive:

they can federalize their claims and sue for treble dam-

ages merely by tacking a RICO label to any garden-

variety contract or fraud claim. Indeed, the mass of

civil RICO cases involving simple commercial trans-

actions which have been filed in recent years proves

the point. As was so aptly stated by the respondents

in Sedima, civil RICO has become ‘‘a virtually limit-

15See note 2, supra, regarding the lack of any mail fraud alle-

gation in connection with fraudulent inducement, the sole issue

remanded for trial,

less fount of federal jurisdiction over commercial

disputes.’’’®

The significant variation in predicate requirements

depending on whether or not a prior conviction is

deemed required for civil RICO highlights the ap- .

parent inconsistencies in the statute itse:f. When most

of the RICO statute was drafted, there was no provi-

sion for a private right of action; that portion was

added at the last moment. Even the severely divided

Second and Seventh Circuits agree that very little

thought was given to the civil provisions and how they

were intended to work within the primarily criminal

context of RICO.’* They also agree that civil RICO

actions have cut a much broader swath than Congress

ever intended.**

The major difference between Sedima and this case

on one hand, and Haroco on the other is the conclusion

which each court draws from the legislative history of

RICO with respect to the interpretation and appliea-

tion of civil RICO. In that regard, greater polarity

between the courts can hardly be found. Liberty is one

of the victims of that unintended development, which

can be timely remedied only by this Court.

16Sedima, supra, Brief of Respondents Imrex Co., Ine., et al. at

17Sedima, supra, at 490; Haroco, supra, at 393.

18Sedima, supra, at 492; Haroco, supra, at 399.

~~ > seats

CONCLUSION

To maintain the appropriate comity and respect

between state and federal courts as required by 28

U.S.C. §1738, and to resolve the substantial differences

among the courts of this country with regard to the

interpretation of the Racketeer Influenced and Corrupt

Organizations Act, Liberty’s petition for a writ of

certiorari should be granted.

Respectfully submitted,

RIcHARD FROCKT

(Counsel of Record)

CAROL J. CHRISMAN

BARNETT & ALAGTA

The Fifth Avenue Building

444 South Fifth Street

Louisville, Kentucky 40202

(502) 585-4131

Attorneys for Petitioner

APPENDIX

SIXTH CIRCUIT OPINION

RECOMMENDED FOR FULL TEXT PUBLICATION

See, Sixth Circuit Rule 24

No. 83-5750

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Kenneta R. Geoace and

Auperta W.Georce, - - - Plaintiffs-Appellants,

Unrrep Kentucky Bank, Ixc.,

Usrrep Kentucky, Ivc., and

Does 1 through 99, - - - Defendants-Appellees.

Appeal From the United States District Court for the

Western District of Kentucky at Louisville

OPINION—Decided and Filed January 22, 1985

Before Contiz, Circuit Judge; Pumps, Senior Circuit

Judge; and Gitmone, District Judge.*

Purures, Senior Vireuit Judge. This is an appeal by

plaintiffs Kenneth R. and Mrs. Alberta W. George (here-

after “Georges”) from the judgment of the District Court

dismissing their complaint upon the ground that their cause

of action and the issues raised therein are barred by the

doctrines of res judicata, collateral estoppel and the Full

Faith and Credit Act, 28 U.S.C. § 1738. The Georges also

appeal from the earlier order of the District Court dis-

missing that part of their complaint which alleged a viola-

“Honorable Horace W. Gilmore, United States District Judge

for the Eastern District of Michigan, sitting by designation.

tion of the Kentucky Unfair Trade Practices Act, K.R.S.

365.050. The decision on the latier issue became final and

appealable when the District Court dismissed the remainder

of the complaint.

The Georges sought damages against United Kentucky

Bank, Inc. and United Kentucky, Inc. (hereafter “U.K.B.”

or “the Bank”) and “Does 1 through 99” (unspecified direc-

tors and employees who allegedly acted on behalf of the de-

fendant Bank and the defendant Holding Company to estab-

lish the policies or to carry out the conduct challenged in

this case). The defendants were charged with defrauding

the plaintiffs in a series of loans made by the Bank to the

Georges. The complaint charged a R.1.C.O. claim, 18 U.S.C.

§ 1962(c¢), which was based in part upon a mail fraud claim,

18 U.S.C. § 1841; and a number of State law claims with

jurisdiction asserted upon diversity of citizenship.

Prior to the initiation of the present suit by the Georges

in the United States District Court, the Bank filed a fore-

closure action against the Georges in the Circuit Court of

Jefferson County, Kentucky, Case No. 81-CI-09925, styled

United Kentucky Bank, Inc. v. Kenneth R. George, et al.

The basis for the foreclosure action was the Georges’ de-

fault on a series of five loans made by U.K.B. to the

Georges in the original amount of $2,700,000.00.

The Georges filed pleadings in the State Court action, to

which were attached a copy of their complaint in the present

case. The District Court held that the Georges raised and

prosecuted in the State Court action defenses or counter-

claims involving the same questions of law and fact pre-

sented in the Federal Court litigation.

After discovery proceedings in the State Court, the

Bank moved for summary judgment. The State Circuit

Court sustained the Bank’s motion for summary judgment

on almost all issues. The State Court ruled, however, that

the Bank calculated interest on an unacceptable basis and

awarded to the Georges a credit of $11,022.58 for over-

charges on interest. The State Court expressly held that

the Bank was not guilty of any fraud or breach of fiduciary

duty owed by it to the Georges “due to the established in-

dustry practice followed and lack of intent” by the Bank.

After directing that the Georges recover the specified

amounts for overcharges on interest, the State Court

ordered that “all counterclaims and affirmative defenses as

filed by the defendants (the Georges) are hereby dismissed

as herein-before set out.”

The District Court dismissed the complaint in the

present case in a memorandum opimon rendered September

30, 1983, holding as follows:

This Court must give the same recognition to the

judicial rulings of the Kentucky courts to which those

rulings are entitled in Kentucky. 28 U.S.C. § 1738.

St. John v. Wisconsin Employment Relations Board,

340 U. S. 411, 414 (1951); Rollins v. Dwyer, 666 F. 2d

141, 144 (5th Cir. 1982). See, generally, 1B Moore’s

Federal Practice, Para. 0.416[1] (2nd Ed. 1983). Res

judicata provides that a final judgment on the merits

bars all claims based upon the same complaint by the

parties or their privities, including those claims which

were not but could have been litigated. Montana v.

United States, 440 U. S. 147, 153 (1979); Brown v.

Felsen, 442 U. S. 127, 131 (1979) ; Chicot County Drain-

age District v. Baxter State Bank, 308 U. S. 371, 375

(1940). Collateral estoppel provides that once issues

or facts which are necessary to the judgment are ac-

tually litigated and decided by a court of competent

jurisdiction, any determination by that court is conclu-

sive and binding on the parties in any subsequent suit

between the parties, even if the second suit is based

upon a different complaint. Montana v. United States,

supra; Allen v. McCurry, 449 U. S. 90, 94-96 (1980).

In essence, the parties are bound by issues and facts

which have been adjudicated. See generally, Kremer

v. Chemical Construction Corporation, 456 U. 8. 461,

102 S. Ct. 1883, 1889 n.6 (1982); Newman v. Newman,

451 S.W. 2d 417, 419 (Ky. 1970); Restatement

(Second) of Judgments, Sections 17, 18 and 27 (1982).

The District Judge held that the actionable facts in the

present case were before the State Court and that the State

Circuit Judge reached or could have reached all the issues

with the exception of the R.LC.O. claim. With respect to

the R.1.C.0. claim the District Court ruled that the finding

by the State Court that there was no “fraud” on the part

of U.K.B. was sufficient to act as a collateral estoppel to

fraud alleged in the R.I.C.O. action.’

1After the decision of the District Court, the Court of Appeals

of Kentucky in an unpublished opinion rendered February 24,

1984, (No. 83-CA-343-MR) affirmed the decision of the Jefferson

County Cireuit Court on the issues relating to fraud. However,

the State Court of Appeals granted relief on the Bank’s cross-appeal

with respect to the $11,022.58 credit allowed by the trial court to

the Georges. The State Court of Appeals held that the State trial

court was correct in all respects ‘‘except as to the actual dollar

amount allowed as a credit’’ to the Georges. The judgment was

reversed and remanded to the State Court for ‘‘computation of the

difference of fractional percentage to be allowed as the credit.’’

During the oral arguments of the present case before this

Court on September 26, 1984, counsel advised that a motion for

discretionary review of the decision of the State Court of Appeals

was pending in the Supreme Court of Kentucky. This Court post-

poned a decision in the present case until action by the Supreme

(Footnote continued on following page)

— —s 4

We affirm in part and reverse and remand in part, for

the reasons set forth in this opinion.

III

We agree with the District Judge that a Federal Court

must give to a State Court judgment the same preclusive

effect as would be given that judgment under the law of the

State in which judgment was rendered. 28 U.S.C. § 1738.

Migra v. Warren City School District Board of Education,

U. S. , 104 8. Ct. 892, 896 (1984); Kremer v.

Chemical Construction Corp., 456 U. S. 461, 466 n.6 (1982) ;

Allen v. McCurry, 449 U.S. 90 (1980).

In Kentucky the doctrine of res judicata is applicable

when there is identity of parties, identity of causes of action

and the first action is decided on its merits. Newman v.

Newman, 451 8. W. 2d 417, 419 (Ky. 1970); see also Ste-

phens v. Goodenough, 560 S. W. 2d 556, 558 (Ky. 1977);

Hays v. Sturgill, 302 Ky. 31, 193 S. W. 2d 648, 650 (1946).

Kentucky courts also apply the doctrine of collateral es-

toppel. Ward v. Southern Bell Telephone and Telegraph

Co., 436 S. W. 2d 794, 796 (Ky. 1968), overruled on other

grounds, Commonwealth of Kentucky Department of

Transportation, Bureau of Highways v. Louisville Gas &

Electric Co., 526 8. W. 2d 820, 822 (Ky. 1975).

The Georges contend that res judicata cannot act to bar

their absolute right to present their claims in a federal

forum. The Supreme Court rejected this contention in

Allen v. McCurry, supra, 449 U.S. 90, 103-04 (1980).

However, the record in the State Court proceedings

reveals that the Georges made a motion in that Court to

(Footnote continued from preceding page)

Court of Kentucky on the motion pending in that Court. The

Supreme Court of Kentucky entered an order on November 8, 1984

denying the motion for discretionary review.

amend their answer so as to include the affirmative defense

of fraud in the inducement, as opposed to fraud in the

execution of the contract. Tne State Court refused to

permit this amendment. Since this claim of fraud in the

inducement was not adjudicated in the State Court pro-

ceedings and arguably could form the basis of a R.LC.O.

action, we conclude that the District Court erred in dis-

missing the R.I.C.O. claim.

IV.

The Georges also charged the Bank with violations of

the Kentucky Unfair Trade Practices Act, K.R.S. 565.050.

The District Court dismissed this count of the complaint on

the ground that this statute is inapplicable to commercial

lending institutions. The Georges appeal. We agree with

the District Judge’s interpretation of the statute and affirm

on this issue.

The decision of the District Court is affirmed on all

issues except the charges of violation of the R.I.C.O. stat-

ute, 18 U.S.C. § 1962(c), with respect to the allegations of

fraud in the inducement. This part of the judgment is

reversed for the reasons set forth in the last paragraph of

Part III of this opinion. In all other respects the judgment

of the District Court is affirmed.

Affirmed in part, reversed in part, and remanded to the

District Court for further proceedings not inconsistent with

this opinion. No costs are taxed. The parties will bear

their own costs on this appeal.

SIXTH CIRCUIT DENIAL OF REHEARING

No. 83-5750

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

KENNETH R. GrorGE and

ALBERTA W.GeEorGE, - - ~- Plaintiffs-Appellants,

Vv.

Untrep Kentucky Bank, Inc.,

Untrep Kentucky, Inc., and

Dors 1 through 99, - - - Defendants-Appellees.

ORDER DENYING PETITION FOR REHEARING

Filed February 21, 1985

Before Contir, Circuit Judge, Pumurps, Senior Circuit

Judge, and Giumorg, District Judge.*

Appellees have filed a petition for rehearing.

Upon consideration, the Court concludes that the peti-

tion presents no issues requiring rehearing.

Accordingly, it is OrperEep that the petition for rehear-

ing be and hereby is denied.

Entered by order of the Court.

(s) John P. Hehman

Clerk

*Honorable Horace W. Gilmore, United States District Judge

for the Eastern District of Michigan, sitting by designation.

DISTRICT COURT OPINION

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF KENTUCKY

AT LOUISVILLE

Civil Action No. C 82-0021 L(A)

KENNETH R. Georce and

AvsBerta W. GeorceE, "The - - - Plaintiffs,

Vv.

Unitep Kentucky Bank, Inc.,

Unitep Kentucky, Ivc., and

Dogs 1-99, - - - - - - - Defendants.

MEMORANDUM OPINION

Kenneth R. George and Alberta W. George (“Georges”)

bring this action against the United Kentucky Bank

(“UKB”) seeking damages for allegedly defrauding the

plaintiffs during several loan transactions. Jurisdiction is

based upon diversity, 28 U.S.C. §1332. Plaintiffs also

allege a complaint under both 18 U.S.C. §1962(¢c), “RICO”,

and 18 U.S.C. §1341. “Mail Fraud.” [sic] Initially, the

plaintiffs moved for an expedited production of documents.

This Court sustained that motion in part. The plaintiffs

now move this Court to modify that order. The defendants

also moved this Court for a protective order precluding

discovery on the grounds of res judicata, collateral estop-

pel, and full faith and credit. The defendants responded

contending that such an order would effectively dismiss the

case. The plaintiffs subsequently moved to dismiss the

case, citing the same grounds of res judicata, collateral

estoppel, and full faith and credit. 28 U.S.C. $1738; Fed-

AO NAA eT | oe Ee we = wo

eral Rule of Civil Procedure 12(b). After careful consid-

eration, this Court sustains the motion to dismiss.

This case arises out of a series of loan transactions

between the UKB and the Georges. Essentially, the

Georges agreed to a “floating” or “variable” interest rate

which was based upon a rate described as the “prime rate,”

a rate which the UKB allegedly charged its best customers.

The parties agreed that the rate would fluctuate, but ac-

cording to the Georges’ amended complaint, the UKB “rep-

resented to the plaintiffs that, as a matter of fact, defend-

ants UKB and employees were possessed of no reasonable

expectation that the prime rate of defendant UKB weuld

ever exceed, at the absolute maximum, thirteen (13%) per-

cent.” First Amended Complaint, Para. 26.

Subsequently, the UKB charged the Georges an interest

rate in excess of 13%, allegedly due to fluctuating economic

conditions. The Georges protested the increased rates and

finally ceased payment on the notes. The UKB moved to

foreclose the notes and to attach the Georges’ property in

Louisville which was secured as collateral for the loans.

The UKB filed that action in Jefferson Circuit Court

(court of general jurisdiction), Louisville, Kentucky.

Meanwhile, the Georges filed this action and amended their

ewmplaint. Then, the Georges filed an answer in state

court, adopting the allegations in this complaint and

amended complaint as “additional defenses” and “incorpo-

rated by reference” those claims in the state court answer.

After discovery proceedings, the UKB, plaintiff in the

state court proceeding, moved for summary judgment.

The Georges, defendants in the state court proceeding,

contended that the UKB defrauded them by (1) misrepre-

senting the “prime rate” and (2) calculating the “per an-

num” interest rate on a 360-day basis rather than on a 365-

day basis. The state court overruled the Georges’ motion

10a

to amend their answer to state the defense of fraud in the

inducement relating to the notes.

The Jefferson Circuit Court, the Honorable Richard A.

Revell, Judge, sustained the UKB’s motion for summary

judgment on almost all issues. First, Judge Revell found

that the UKB calculated interest on a 360-day basis and

that this traditional practice was not acceptable with the

use of modern computer technology, and that the defend-

ants (the Georges) were entitled to a credit of $11,022.58

for overcharges on the interest on their loans up to and

including March 1, 1981. However, Judge Revell found

that the Georges’ “claim of breach of fiduciary duty and

fraud for plaintiff’s calculation using the 360-day basis is

unfounded due to the established industry practice followed

and lack of intent by the plaintiff(.)” United Kentucky

Bank, Inc. v. George, 81 CI-09925, Jefferson Circuit Court,

October 25, 1982 (“Revell Op.”), at 1-2.

Second, Judge Revell found that the UKB “has not been

arbitrary in calculation of its prime rate by using the

methodology of adjusting its prime rate in conformity with

changes by four out of eight money center banks, and

further, defendants (the Georges) were granted the same

prime rate as all other borrowers similarly situated(.)”

Furthermore, Judge Revell found that “the term ‘prime

rate’ as employed by United Kentucky Bank, Inc. and ap-

plied to the uncontroverted facts of this action, is not

illusory and, therefore, not a breach of the contract be-

tween the parties(,)” and “Kenneth R. George is astute,

sophisticated, and experienced borrowers (sic), as reflected

in their affidavits in the record.” Revell Op. at 2. Finally,

the Judge adopted the stipulation of counsel that all loans

which were “prime or prime related” were made at the

same rate extended to the Georges.

Based upon those facts, Judge Revell found as a matter

of law that the setting and charging of the prime rate by

ey ee ee

lla

the UKB was “not a breach of contract, fraud, or breach

of fiduciary duty as to the defendants.” Furthermore, “the

calculation of interest on a 360-day basis is an overcharge

of interest and, therefore, a breach of contract, but is not

a fraud or breach of fiduciary duty, owed the defendants

by the plaintiff.” Revell Op. at 3.

Finally, after ordering that the plaintiffs recover the

specified amounts of the notes from the defendants, Judge

Revell ordered that “all counterclaims and affirmative de-

fenses as filed by the defendants (the Georges) are hereby

dismissed except as herein-before set out.” Revell Op. at 5.

The judgment was “final and appealable” under Kentucky

CR 54.02(1). Revell Op. at 6. This Court notes in passing

that Kentucky’s CR 56 and Fed. R. Civ. P. 56 are essentially

the same as are Kentucky’s CR 54.02 and Fed. R. Civ. P.

54(b).

In this Court, the UKB argues that res judicata and

collateral estoppel bar any further action by the Georges

because this Court must give full faith and credit to the

state court’s determination. 28 U.S.C. §1738. The UKB

argues that since the state court found that the UKB had

not defrauded the Georges in the setting or charging of the

floating interest rate, the George are precluded from as-

serting the RICO and Mail Fraud claims under collateral

estoppel. The UKB further argues that the claim for fraud

in the inducement is barred by res judicata.

In response, the Georges contend that (1) the state

court reached its decision on a motion for summary judg-

ment and, therefore, the decision is less binding than a

decision reached after a full trial, (2) that the decision is

on appeal and is not a “final” decision, (3) that the state

court did not apply the same standard of “fraud” necessary

to find “fraud” in RICO actions, and (4) that this Court

has exclusive jurisdiction over RICO actions and, therefore,

has exclusive jurisdiction over this case by pendent juris-

12a

diction. Although the Georges’ amended complaint con-

tains ten (10) counts, the Georges principal concern ap-

pears to be Counts 1-3 (RICO) and Count 7 (Fraud in the

Inducement).

This Court must give the same recognition to the judi-

cial rulings of the Kentucky courts to which those rulings

are entitled in Kentucky. 28 U.S.C. $1738. St. John v.

Wisconsin Employment Relations Board, 340 U. S. 411, 414

(1951) ; Rollins v. Dwyer, 666 F. 2d 141, 144 (5th Cir. 1982).

See, generally, 1B Moore’s Federal Practice, Para. 0.416

[1] (2nd Ed. 1983). Res judicata provides that a final

judgment on the merits bars all claims based upon the

same complaint by the parties or their privities, including

those claims which were not but could have been litigated.

Montana v. United States, 440 U. S. 147, 153 (1979); Brown

v. Felsen, 442 U. S. 127, 131 (1979); Chicot County Drain-

age District v. Baxter State Bank, 308 U. S. 371, 375 (1940).

Collateral estoppel provides that once issues or facts which

are necessary to the judgment are actually litigated and

decided by a court of competent jurisdiction, any determi-

nation by that court is conclusive and binding on the parties

in any subsequent suit between the parties, even if the

second suit is based upon a different complaint. Montana

v. United States, supra; Allan v. McCurry, 449 U. S. 90,

94-96 (1980). In essence, the parties are bound by issues

and facts which have been adjudicated. See generally,

Kremer v. Chemical Construction Corporation, _ U. 8. —,

102 S. Ct. 1883, 1889 n. 6 (1982); Newman v. Newman, 451

S. W. 2d 417, 419 (Ky. 1970); Restatement (Second) of

Judgments, Sections 17, 18 and 27 (1982).

The essential question is whether the facts alleged by

the Georges in this suit were before Judge Revell in state

court. The “Actionable Facts” are alleged in Paragraphs

28-31 of the amended complaint. The Georges allege that

the UKB regularly extended credit to other customers at

13a

a lower rate than the Georges received. Para. 30 (x and

xiii). The Georges also ailege that the UKB set the prime

rate at the UKB’s “sole judgment, discretion, whim, and

caprice ... .”, Para. 30(v); that the UKB misrepresented

the method in which interest would be computed on a “per

annum” basis by computing the interest on a 360-day basis

instead of a 365-day basis, Para. 30 (vi, xi, and xii); that

the UKB had a superior financial expertise and knowledge

which allowed it to take advantage of the Georges, Para 30

(viii); and that the UKB misrepresented to the Georges

that the maximum price rate would not exceed thirteen

percent, Para. 30 (iii) ; and that the UKB made these mis-

representations to the Georges in the context of a long-

standing financial relationship which constituted a breach

of fiduciary duty, Para. 30 (vii). The Georges allege a

RICO violation because the UKB used the mails to send

the Georges their interest statements and bills.

This Court finds that Judge Revell reached or could

have reached all these issues, with the exception of the

RICO claims. Judge Revell found that there was no fraud

in the establishment, calculation or application of the prime

rate. The allegation of “whim and caprice” is countered

by the Judge’s finding of no arbitrary action on the part

of the UKB. Judge Revell explicitly found that there was

no specific intent to defraud because the UKB followed

generally accepted industry practices by establishing its

prime rate in reliance on “four out of eight money center

banks,” that the rate was not “illusory,” and that other

lenders similarly situated were granted the same rate as

the Georges. Supra. Therefore, the Georges are precluded

from raising any issues dealing with “fraud” in the estab-

lishment and application of the prime rate and the act of

mailing the interest statements could not constitute a RICO

violation. Thus, this Court dismisses Counts 1-3 (RICO),

Count 4 (Common Law Fraud), and Count 5 (Misrepre-

l4a

sentation) of the amended complaint under collateral

estoppel.

Judge Revell also found that the UKB had not been

arbitrary in its caleulation of the prime rate, that the

prime rate was not a breach of contract, and that Mr.

George was an experienced borrower. Therefore, this

Court finds that these findings are res judicata defenses

to Counts 4 and 5 above, as well as res judicata to Count

6 (Unconscionability) and Count 8 (Reformation of the

Contracts). Moreover, Counts 4, 5, 6, 8, and 7 (Fraud in

the Inducement) could have been asserted in the state

court proceedings. Therefore, the state court judgment

is res judicata to those Counts for this reason as well.

Chicot County v. Baxter State Bank, supra; Stephens v.

Goodenough 560 S. W. 2d 556, 558 (Ky. 1977).

The Georges prevailed in state court on the issue of

“per annum” calculation of interest rates. Judge Revell

held that the calculation of interest on a 260-day basis was

a breach of contract but was not an act of fraud. There-

fore, the state court judgment is res judicata to Count 9

(Declaratory Judgment—‘Per Annum”).

Finally, this Court finds that the Count 10 (Breach of

Confidential Relationship) states a claim for fraud, breach

of fiduciary duty and overreaching (unconscionability).

Thus, the state court judgment is res judicata to this count

as well. This Court has already dismissed Count 11 (Un-

fair Trade Practices).

In the alternative, Judge Revell overruled “all counter-

claims and affirmative defenses” advanced by the Georges.

Since the Georges incorporated the complaint and amended

complaint in their answer, this Court finds that Judge

Revell had all the facts and arguments which the Georges

advance in this Court before him in state court. There-

fore, that portion of Judge Revell’s order also operates

15a

as res judicata to all facts and issues in this complaint

which were properly before the state court.

This Court rejects the arguments raised by the Georges.

First, a decision based upon summary judgment is “valid”

for purposes of both res judicata and collateral estoppel.

“Both claim preclusion (res judicata) and issue preclusion

(collateral estoppel) result from summary judgments that

rest on the lack of any genuine issue of material fact going

to the merits of the claim or defense.” Wright, Miller &

Cooper, Federal Practice and Procedure: Jurisdiction, See.

4444 (West 1981). See, eg. O'Neill v. Dell Publishing

Company, 630 F. 2d 690 (1st Cir. 1980); Mayer v. Distal

Tool & Machine Company, 556 F. 2d 798 (6th Cir. 1977).

While the Georges do not directly argue that a summary

judgment is inappropriate for claim and issue preclusion,

they attack the point indirectly. The Georges argue in one

of their briefs that since they were not the moving party

on the motion for summary judgment, therefore they were

not required to assert all their defenses, and that this fact

detracts from the required “finality” of the state court

decision. A party opposing summary judgment may not

rely on the pleadings alone but must make some affirma-

tive showing that a genuine issue of fact exists. Neel v.

Wagner-Shuck Realty Company, 576 S. W. 2d 246, 250

(Ky. App. 1978); Samuels v. Spangler, 441 S. W. 2d 129,

131 (Ky. 1969) ; Hayes v. Rodgers, 447 S. W. 2d 597, 600-01

(Ky. 1969). Cf. Adickes v. Kress Company, 398 U.S. 144,

161 (1970); Sherrod v. Piedmont Aviation, Inc., 516 F.

Supp. 39, 45 (E.D. Tenn. 1978). Kentucky law requires

that a party assert all claims and defenses in the same

action. Newman v. Newman, supra; Stephens v. Good-

enough, supra. Therefore, the Georges were required to

contest the UKB’s motion for summary judgment in state

court with the requisite showing of a question of fact on

each issue. The Georges did not meet that burden and

16a

this Court cannot question the state court’s judgment on

its merits.

Second, this decision is “final” for purposes of res

judicata and collateral estoppel while on appeal. The

parties agree that the decision is res judicata while on ap-

peal. See, e.g., Fidelity Standard Life Insurance Company

v. First National Bank, 510 F. 2d 272, 273 (5th Cir., 1975) ;

1B Moore’s Federal Practice, Para. 0.416[3] (2d Ed. 1983).

However, the Georges argue that the state court decision

is not final for purposes of collateral estoppel, relying on

Watson v. Roberts, Scott &€ Company, 466 F. 2d 1348 (9th

Cir. 1972). This Court must accord the same “full faith

and credit” to the state court decision to which that decision

is entitled in the rendering state under the rendering

state’s law. 28 U.S.C. $1738. In Watson, California law

expressly provided that a state court judgment was not

final for purposes of collateral estoppel while on appeal.

466 F’. 2d at 1349. There is no similar statute in Kentucky.

The only Kentucky case which this Court can discover

holds that “‘an appeal shall not stay proceeding on a

judgment unless superedeas (sic) be issued.’” Small v.

Reeves, 25 Ky. L. Rep, 729, 733, 76 S. W. 395, 397 (Ky.

1903) (dealing with res judicata, not collateral estoppel).

See, also, Smith v. Farmer’s Bank of Vine Grove, 21 Ky.

L. Rep. 375, 376, 51 S. W. 451 (Ky. 1899). First, there is

no record of any supersedeas bond having been filed in

this case. Second, this Court notes that both Small v.

Reeves and Smith v. Farmer’s Bank were decided under

the old Civil Practice Code, since repealed.

Under the new Civil Rules, which are similar to the

Federal Rules, there are no reported decisions regarding

this issue. Compare CR 62 with Fed. R. Civ. P. 62. With

no other authority, this Court adopts the Federal Rule

which provides that a decision pending appeal is entitled

to both res judicata and collateral estoppel effect. Huron

17a

Holding Corporation v. Lincoln Mine Operating Company,

312 U. S. 183, 188-89 (1941); 1B Moore’s Federal Prac-

tice, Para. 0.416[3], supra.

The Georges also argue that the decision is not final

because the UKB cannot enforce the judgment. The

Georges have filed a petition in bankruptcy (in Florida)

and no judgment can be enforced against the Georges

under the automatic stay provisions to apply to the “en-

forcement” of a judgment against the debtor, not to the

“finality” of a decision for purposes of prior adjudication

[sic]. Cf. Huron Holding Corporation, supra. Otherwise, a

debtor could continue to file “vexatious” litigation while

avoiding the traditional bars of prior adjudication in judg-

ments already rendered. This Court finds no support for

this position and the Georges cite no authority for this in-

terpretation of the Bankruptcy Code.

Third, Judge Revell’s finding that there was no “fraud”

in the UKB’s actions is sufficient to act as collateral estop-

pel to fraud in a RICO action. The Georges argue that

Judge Revell did not describe the “standard” by which he

judged or defined the term “fraud,” and that the standards

for statutory fraud are more inclusive than the standards

for common law fraud. Again, this Court disagrees.

Under Kentucky law, “fraud” consists of the elements

of (1) a material misrepresentation, (2) which is false,

(3) known to be false or made recklessly, (4) made with

inducement to be acted upon, (5) acted in reliance ther-on,

and (6) causing injury. Wahba v. Don Corlett Motors, Inc.,

573 S. W. 2d 357, 359 (Ky. App. 1978); Scott v. Farmer’s

State Bank, 410 S. W. 2d 717, 720 (Ky. 1967). Specific

intent to deceive, i.e, “scienter” is a required element.

E.g., Godley v. Piedmont Land Sales, Inc., 505 ¥. Supp.

397, 402 (E.D. Ky. 1978); Bunch v. Bertram, 219 Ky. 848,

851-52, 294 S. W. 805 (1927).

18a

The Georges’ RICO complaint is based upon an alleged

mail fraud, 18 U.S.C. §1341. Specific intent is also a re-

quired elements of this offense. United States v. Kreimer,

609 F. 2d 126, 128 (Sth Cir. 1980) ; United States v. Shipp,

359 F. 2d 185, 188 (6th Cir.), cert. denied, 385 U. S. 903

(1966). “The fraudulent nature of a scheme should not

be measured by a technical standard. . . . ‘The law does

not define fraud; it needs no definition; it is as old as

falsehood and as versable as human ingenuity... . [stc]”

United States v. Stanford, 589 I’. 2d 285, 296 (7th Cir.

1978) (citations omitted) ; United States v. Kreimer, supra.

In this case, Judge Revell found no specific intent to de-

fraud. The Georges cite no authority demonstrating any

difference between “specific intent” in a civil case and

“specific intent” in a criminal case or “specific intent” in

a RICO ease. Therefore, Judge Revell’s finding operates

as a bar to any further action on the RICO claim.

Finally, the Georges argue that since this Court has

exclusive jurisdiction over RICO claims, this Court has

exclusive jurisdiction over all related claims arising out

of the same nucleus of “operative facts.” Therefore, the

Georges argue the state court had no jurisdiction to de-

termine the claims which were before it because those

claims were also pendent to the RICO claims in this Court.

Generally, federal courts may not enjoin state court pro-

ceedings. 28 U.S.C. §2283; E.g., Lamb Enterprises, Inc.

v. Kiroff, 549 F. 2d 1055 (6th Cir. 1977). The fact that

an exclusively federal question is raised as a defense to

a contract action in state court does not justify the issuance

of an injunction staying the state proceeding. Avon Pub-

lishing Company v. American News Company, 143 F. Supp.

516 (S.D. N.Y. 1956).

The plaintiff cites several cases which stand for the

principle that a federal court acquires pendent jurisdiction

over related claims when the Court acquires exclusive juris-

19a

diction over one of the claims. That principle is undis-

puted. However, plaintiff cites no authority for the

proposition that once concurrent jurisdiction is established,

as in this case, federal court jurisdiction supersedes state

court jurisdiction in regard to matters over which the state

court has proper jurisdiction. While this Court may ex-

ercise jurisdiction over pendent claims such as those at

issue in this case, this Court finds no authority for over-

ruling a valid state court judgment adjudicating those

claims, especially after the state court has reached a de-

cision. This Court notes that the plaintiffs made no at-

tempt to stay the state court proceedings pending com-

pletion of this case.

Had this case come before this Court prior to the state

court’s decisior, this Court could have exercised pendent

jurisdiction over the state court claims. However, this

Court is now barred from that course by the principle of

prior adjudication. Since this Court could not have en-

joined the state court proceedings, this Court has no choice

but to give full faith and credit to the resulting state

judgment. While that judgment did not directly adjudi-

cate the RICO claims in Counts 1-3, the judgment did pre-

clude those claims by collateral estoppel.

In summary, this Court finds that the state court judg-

ment disposes of this case on the principles of res judicata

and collateral estoppel. If the judgment is reversed by

the Kentucky Court of Appeals or the Kentucky Supreme

Court, the parties may move to reopen the case. Rule

60(b) (5). See 1B Moore’s Federal Practice, Para. 0.416[1],

supra. This Court will consider any additional discovery

matters should such an event occur. Therefore, this Court

will file the plaintiff's surreply memorandum of August 15,

1983, sustain the defendant’s motion to dismiss, and over-

rule all other motions.

20a

A judgment in accordance with this memorandum opin-

ion will be entered this day.

Dated 9/30/83

(s) Charles M. Allen

Charles M. Allen, Chief Judge

ec: Counsel of Record

21la

DISTRICT COURT JUDGMENT

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF KENTUCKY

AT LOUISVILLE

Civil Action No. C 82-0021 L (A)

KeEennetu R. Grorce and

ALBERTA W. GEORGE, - - - - - Plaintiffs,

Vv.

Unitep Kentucry Bank, Inc.,

Unitep Kentucky, Inc., and

Dome 1-99, - - -+- = + -+ - £Defendants.

JUDGMENT

This case, having come before the Court on various

motions, and the Court, having been advised, and having

entered its memorandum opinion this day, therefore,

Ir Is OnpERED AND ApsupGeD that the plaintiffs’ motion

to file a surreply brief be, and the same hereby is sustained,

and the Clerk shall file the surreply brief.

Ir Is FurtHEeR ORDERED AND ApDsuDGED that the defend-

ants’ motion to dismiss be and the same hereby is sustained.

Ir Is FurtHer OrpERED AND ApsupGED that all other

motions be and the same are hereby overruled.

This is a final and appealable judgment and there is no

just cause for delay.

Dated: September 30, 1983

(s) Charles M. Allen, Chief Judge

ee: Counsel of Record

22a

JEFFERSON CIRCUIT COURT SUMMARY JUDGMENT

JEFFERSON CIRCUIT COURT

FOURTH DIVISION

No. 81 CI-09925

Unirep Kentucky Bank, Inc. (formerly doing

business as Louisville Trust Bank) - - Plaintiffs

Vv.

KenneTH R. Georck, Et Au. - - - Defendants

SUMMARY JUDGMENT

The motion of the plaintiff, United Kentucky Bank, Inc.,

having been made for summary judgment pursuant to

CR 56, and it appearing that there are no material issues

of fact, the Court finds that:

1. (a) The plaintiff, United Kentucky Bank, Inc., cal-

culated interest on the loans for the defendants on a 360

day basis. The Court is of the opinion that this traditional

practice is not acceptable with the use of modern computer

technology and, therefore, the defendants are entitled to a

credit on the amounts granted by this judgment in the sum

of $11,022.58 for over charges on interest on the notes of

the action to March 1, 1981; :

(b) The defendants claim of breach of fiduciary

duty and fraud for the plaintiff’s calculation using the 360

day basis is unfounded due to the established industry

practice followed and lack of intent by the plaintiff;

culation of its prime rate by using the methodology of ad-

justing its prime rate in conformity with charges by four

out of eight money center banks, and further, defendants

_ =

23a

were granted the same prime rate as all other borrowers

similarly situated ;

(d) That as to the mortgage recorded at Mortgage

Book 1809, Page 918, in the office of the clerk of Jefferson

County, and the note for $250,000.00 dated October 26, 1987,

and being all of count three of plaintiff’s complaint, was not

in default at the time of filing of the complaint, and further

the mortgage not providing security to any other debts of

the defendants due to certain portions of the mortgage not

being properly completed, the plaintiff’s complaint is dis-

missed as to count three without restraint on the plaintiff

to refile its complaint for a default occurring after October

28, 1981;

(e) That the term “prime rate” as employed by

United Kentucky Bank, Ine. and applied to the uncontra-

verted facts of this action, is not illusory and, therefore,

not a breach of the contract between the parties ;

(f) That Kenneth R. George is astute, sophisticated,

and experienced borrowers, as reflected in their affidavits

in the record [sic];

(g) That the stipulations of counsel dated October

21, 1981 are hereby adopted as findings of this Court.

2. As a matter of law, the setting and charging by

United Kentucky Bank, Inc. of its prime rate is not a

breach of contract, fraud, or breach of fiduciary duty as to

the defendants.

3. As a matter of law, the calculation of interest on a

360 day basis is an overcharge of interest and, therefore, a

breach of contract, but is not a fraud or breach of fiduciary

duty, owed to the defendants by the plaintiff.

4. That United Kentucky Bank, Inc. is entitled, as a

matter of law, to judgment on the five (5) notes attached to

its complaint and marked as Exhibits 1, 4, 6, 7 and 11.

24a

do. That the pleadings having been closed, all amend-

ments after June 1, 1982, were not allowed filed.

6. That all previous interlocutory orders are made

final by this order.

ORDER

Therefore, it is the order of this Court that:

1. The plaintiffs recover of the defendants, Kenneth

R. George and Alberta W. George, and each of them, jointly

and severally, the sum of $723,791.69, plus accrued interest

of $143,961.07, calculated on the 365 day basis, plus interest

thereon at the rate of the prime rate of interest charged by

United Kentucky Bank from time to time, plus one-half

percent (44%) per annum from October 15, 1982, plus costs

expended by plaintiff herein, until judgment, and interest

at the prevailing statutory rate from the date of judgment

until paid.

2. That the plaintiff recover of the defendants, Ken-

neth R. George and Alberta W. George, and each of them,

jointly and severally, the principal sum of $1,158,268.92,

with accrued interest of $242,236.90, caleulated on a 365 day

basis, plus the prime rate of interest as charged by United

Kentucky Bank from time to time, plus one and one-half

percent (14%) per annum from October 15, 1982, plus

costs expended by plaintiff herein, until judgment, and

interest at the prevailing statutory rate from the date of

judgment until paid.

3. That plaintiff recover of the defendants, Kenneth

R. George and Alberta W. George, doing business as York-

town Lumber Company, and each of them, jointly and

severally, the principal sum of $150,000.00, plus accrued

interest of $30,419.16, calculated on a 365 day basis, and

interest at the prime rate of interest as charged by United

Kentucky Bank from time to time, plus one percent (1%)

25a

per annum from October 15, 1982, plus costs expended by

plaintiff herein, until judgment and interest at the prevail-

ing statutory rate from the date of judgment until paid.

4. That the plaintiff recover of the defendants, Ken-

neth R. George and Alberta W. George, doing business as

Yorktown Lumber Company, and each of them, jointly and

severally, the principal sum of $50,000.00, plus accrued

interest of $9,822.53, calculated on a 365 day basis, at the

prime rate of interest as charged by United Kentucky

Bank from time to time plus one-half percent (12%) per

annum from October 15, 1982, plus costs expended by plain-

tiff herein, until judgment, and interest at the prevailing

statutory rate from the date of judgment until paid.

5. The plaintiff recover of the defendants, Kenneth R.

George and Alberta W. George, and each of them jointly

and severally, the principal sum of $50,000.00, plus accrued

interest of $9,882.63, from October 15, 1982, calculated on

the 365 day basis, at the prime rate of interest charged by

United Ketnucky Bank, Inc. from time to time, plus one-half

pereent (14%) per annum from October 15, 1982 until date

of judgment until paid, plus costs expended by the plaintiff

herein, and interest from the date of judgment at the pre-

vailing statutory rate until paid.

6. That all counterclaims and affirmative defenses as

filed by the defendants are hereby dismissed except as

hereinbefore set out.

7. That the plaintiff shall tender an order of sale con-

sistent with its complaint and this order.

8. The attorneys for the plaintiffs are entitled to a fee

for their services rendered herein, this matter is hereby

retained for further proceedings.

9. Pursuant to CR 54.02(1), it is adjudged that this is

a final and appealable judgment, and there is no just reason

for delay.

26a

(s) Richard A. Revell

Judge, Jefferson Circuit Court

Date: October 25, 1982

Tendered By:

(s) Richard Frockt

Richard Frockt

Thurman L. Sisney

Barnett & Alagia

1700 Kentucky Home Life Building

Louisville, Kentucky 40202

(502) 585-4131

Counsel for United Kentucky Bank

27a

TEXT OF RELEVANT STATUTES

TITLE 18 UNITED STATES CODE

Mail Fraud

§ 1341. Frauds and swindles

Whoever, having devised or intending to devise any

scheme or artifice to defraud, or for obtaining money or

property by means of false or fraudulent pretenses, repre-

sentations, or promises, or to sell, dispose of, loan, exchange,

alter, give away, distribute, supply, or furnish or procure

for unlawful use any counterfeit or spurious coin, obliga-

tion, security, or other article, or anything represented to

be or intimated or held out to be such counterfeit or spur-

ious article, for the purpose of executing such scheme or

artifice or attempting so to do, places in any post office or

authorized depository for mail matter, any matter or thing

whatever to be sent or delivered by the Postal Service, or

takes or receives therefrom, any such matter or thing, or

knowingly causes to be delivered by mail according to the

direction thereon, or at the place at which it is directed to

be delivered by the person to whom it is addressed, any

such matter or thing, shall be fined not more than $1,000

or imprisoned not more than five years, or both.

RICO

§ 1961. Definitions

As used in this chapter:

(1) “racketeering activity” means (A) any act or

threat involving murder, kidnaping, gambling, arson,

robbery, bribery, extortiop, or dealing in narcotic or

other dangerous drugs, which is chargeable under State

law and punishable by imprisonment for more than one

year; (B) any act which is indictable under any of the

following provisions of title'18, United States Jode:

Section 201 (relating to bribery), section 224 (relating

to sports bribery), sections 471, 472, and 473 (relating

to counterfeiting), section 659 (relating to theft from

28a

interstate shipment) if the act indictable under section

659 is felonious, section 664 (relating to embezzlement

from pension and welfare funds), sections 891-894 (re-

lating to extortionate credit transactions), section 1084

(relating to the transmission of gambling information),

section 1341 (relating to mail fraud), section 1343 (re-

lating to wire fraud), section 1503 (relating to obstrue-

tion of justice), section 1510 (relating to obstruction of

criminal investigations), section 1511 (relating to the

obstruction of State or local law enforcement), section

1951 (relating to interference with commerce, robbery,

or extortion), section 1952 (relating to racketeering),

section 1953 (relating to interstate transportation of

wagering paraphernalia), section 1954 (relating to un-

lawful welfare fund payments), section 1955 (relating

to the prohibition of illegal gambling business), sec-

tions 2314 and 2315 (relating to interstate transporta-

tion of stolen property), sections 2341-2346 (relating to

trafficking in contraband cigarettes), sections 2421-24

(relating to white slave traffic), (C) any act which is

indictable under title 29, United States Code, section

186 (dealing with restrictions on payments and loans to

labor organizations) or section 501(c) (relating to em-

bezzlement from union funds), or (D) any offense in-

volving fraud connected with a case under title 11,

fraud in the sale of securities, or the felonious manu-

facture, importation, receiving, concealment, buying,

selling, or otherwise dealing in narcotic or other dan-

gerous drugs, punishable under any law of the United

States;

(2) “State” means any State of the United States,

the District of Columbia, the Commonwealth of Puerto

Rico, any territory or possession of the United States,

any political subdivision, or any department, agency,

or instrumentality thereof ;

29a

(3) “person” includes any individual or entity

eapable of holding a legal or beneficial interest in

property ;

(4) “enterprise” includes any individual, partner-

ship, corporation, 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;

(6) “unlawful debt” means a debt (A) incurred or

contracted in gambling activity whicb was in violation

of the law of the United States, a State or political sub-

division thereof, or which is unenforceable under State

or Federal law in whole or in part as to principal or

interest because of the laws relating to usury, and (B)

which was incurred in connection with the business of

gambling in violation of the law of the United States,

a State or political subdivision thereof, or the business

of lending money or a thing of value at a rate usurious

under State or Federal law, where the usurious rate is

at least twice the enforceable rate;

(7) “racketeering investigator” means any attor-

ney or investigator so designated by the Attorney Gen-

eral and charged with the duty of enforcing or carrying

into effect this chapter;

(8) “racketeering investigation” means any in-

quiry conducted by any racketeering investigator for

the purpose of ascertaining whether any person has

been involved in any violation of this chapter or of any

final order, judgment, or decree of any court of the

30a

United States, duly entered in any case or proceeding

arising under this chapter;

(9) “documentary material” includes any book,

paper, document, record, recording, or other material;

and

(10) “Attorney General” includes the Attorney

General of the United States, the Deputy Attorney

General of the United States, any Assistant Attorney

General of the United States, or any employee of the

Department of Justice or any employee of any depart-

ment or agency of the United States so designated by

the Attorney General to carry out the powers con-

ferred on the Attorney General by this chapter. Any

department or agency so designated may use in investi-

gations authorized by this chapter either the investiga-

tive provisions of this chapter or the investigative

power of such department or agency otherwise con-

ferred by law.

§ 1962. Prohibited activities

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

ceived 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 such income, in

acquisition of any interest in, or the establishment or op-

eration of, any enterprise which is engaged in, or the activi-

ties of which affect, interstate or foreign commerce. A

purchase of securities on the open market for purposes of

investment, and without the intention of controlling or

participating in the control of the issuer, or of assisting

another to do so, shall not be unlawful under this subsec-

tion if the securities of the issuer held by the purchaser,

3la

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.

(b) It shall be unlawful for any person through a

pattern of racketeering activity or through collection of an

unlawful debt to acquire or maintain, directly or indirectly,

any interest in or control of any enterprise which is en-

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

foreign commerce.

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 ac-

tivity or collection of unlawful debt.

(d) It shall be unlawful for any person to conspire to

violate any of the provisions of subsections (a), (b), or (c)

of this section.

§ 1964. Civil remedies

(a) The district courts of the United States shall have

jurisdiction to prevent and restrain violations of section

1962 of this chapter by issuing appropriate orders, in-

cluding, but not limited to: ordering any person to divest

himself of any interest, direct or indirect, in any enterprise;

imposing reasonable restrictions on the future activities or

investments of any person, including, but not limited to,

prohibiting any person from engaging in the same type of

endeavor as the enterprise engaged in, the activities of

which affect interstate or foreign commerce; or ordering

dissolution or reorganization of any enterprise, making due

provision for the rights of innocent persons.

32a

(b) The Attorney General may institute proceedings

under this section. In any action brought by the United

States under this section, the court shall proceed as soon as

practicable to the hearing and determination thereof. Pend-

ing final determination thereof, the court may at any time

enter such restraining orders or prohibitions, or take such

other actions, including the acceptance of satisfactory per-

formance bends, as it shall deem proper.

reason of a violation of section 1962 of this chapter may sue

therefor in any appropriate United States district court

and shall recover threefold the damages he sustains and

the cost of the suit, including a reasonable attorney’s fee.

(d) A final judgment or decree rendered in favor of

the United States in any criminal proceeding brought by

the United States under this chapter shall estop the de-

fendant from denying the essential allegations of the

criminal offense in any subsequent civil proceeding brought

by the United States.

TITLE 28 UNITED STATES CODE

Supreme Court Jurisdiction

§ 1254. Courts of appeals; certiorari; appeal; certified

questions

Cases in the courts of appeals may be reviewed by the

Supreme Court by the following methods:

(1) By writ of certiorari granted upon the peti-

tion of any party to any civil or criminal case, before

or after renditior of judgment or decree;

(2) By appeal by a party relying on a State

statute held by a court of appeals to be invalid as re-

pugnant to the Constitution, treaties or laws of the

United States, but such appeal shall preclude review by

writ of certiorari at the instance of such appellant, and

33a

the review on appeal shall be restricted to the Federal

questions presented ;

(3) By certification at any time by a court of ap-

peals of any question of law in any civil or criminal

ease as to which instructions are desired, and upon

such certification the Supreme Court may give bind-

ing instructions or require the entire record to be sent

up for decision of the entire matter in controversy.

Full Faith and Credit

§ 1738. State and Territorial statutes and judicial pro-

ceedings; full faith and credit

The Acts of legislature of any State, Territory, or Pos-

session of the United States, or copies thereof, shall be

authenticated by affixing the seal of such State, Territory

or Possession thereto.

The records and judicial proceedings of any court of

any such State, Territory or Possession, or copies thereof,

shall be proved or admitted in other courts within the

United States and its Territories and Possessions by the

attestation of the clerk and seal of the court annexed, if

a seal exists, together with a certificate of a judge of the

court that the said attestation is in proper form.

Such Acts, records and judicial proceedings or copies

thereof, so authenticated, shall have the same full faith

and eredit in every court within the United States and its

Territories and Possessions as they have by law or usage

in the courts of such State, Territory or Possession from

which they are taken.

CASE

State

Federal

State

34a

CASE CHRONOLOGY

DaTE

10/27/81

1/11/82

11/13/82

2/23/82

3/ 1/82

6/ 4/82

EVENT

Liberty filed a complaint in Jefferson

County Circuit Court, Case No. 81-

CI-09925, for collection of notes and

foreclosure on collateral including

real and personal property and guar-

anties.

The Georges filed their complaint in

the Federal District Court, alleging

fraud, breach of contract, breach of

fiduciary duty, and RICO violations

by mail fraud.

The Georges filed their petition for

removal of the state action to federal

court.

The Georges filed a perfunctory an-

swer in the removed state case.

The removed case was remanded to

state court for lack of subject matter

jurisdiction (incomplete diversity and

no federal question).

The Georges filed a “Supplemental

Answer” in state court incorporating

their January 11 federal court com-

plaint as a defense in the state court

action.

A default judgment was entered in the

State court proceeding against the

Georges as a sanction for failure to

obey the court’s orders concerning

discovery. ar

CasE DaTE

Federal 6/22/82

State 7/15/82

State 8/20/82

State 10/11/82

State 10/21/82

Federal 10/21/82

State 10/25/82

State ii/ 4/82

State 11/25/82

Federal 6/13/83

Federal 9/30/83

35a

EvENT

The Georges filed their first amended

complaint in the federal court, which

by its terms merely “restates and

clarifies” the original complaint.

The default judgment in the state

court action was set aside.

Liberty filed its motion for summary

judgment in the state court.

First hearing on summary judgment.

Second hearing on summary judg-

ment.

The Georges offered an amendment

to their complaint to include a claim

of iraudulent inducement. The

amendment was not permitted to be

filed, due to the Georges having prom-

ised no further alterations of the com-

plaint as partial consideration for

having the default judgment set aside.

Summary JupGMENT for Liberty was

entered in the state court. —

The Georges filed a motion to alter,

amend, or vacate the summary judg-

ment, which was shortly thereafter

denied.

The Georges filed a motion of appeal

of the summary judgment.

Liberty filed its motion to dismiss in

federal court on the grounds of res

judicata and collateral estoppel.

DisMIssaL was granted to Liberty.

CASE

Federal

State

Federal

State

Federal

Date

10/12/83

2/ 2/84

3/14/84

7/18/84

11/ 8/84

1/22/85

2/ 4/85

2/21/85

2/ 6/85

2/22/85

36a

Event é

The Georges filed a notice of appeal

of the dismissal.

Tue Kentucky Court or AppEats AF-

FIRMED the Jefferson Circuit Court’s

summary judgment.

The Georges filed a petition for re-

hearing in the Kentucky Court of Ap-

peals, which was subsequently denied.

The Georges filed a motion for discre-

tionary review by the Kentucky Su-

preme Court.

DISCRETIONARY REVIEW BY THE KEN-

TUCKY SUPREME CourT Was DENIED.

Tue Srixtu Circuir AFrrimmMepn the Dis-

trict Court’s dismissal except for the

fraudulent inducement claim re RICO.

Liberty filed a petition for rehearing

in the Sixth Circuit.

Liberty’s petition for rehearing was

denied.

The Georges filed for certiorari in the

U. 8. Supreme Court regarding the

Kentucky Supreme Court decision.

The petition was denied April 1, 1985.

The Georges filed for certiorari in the

U. S. Supreme Court regarding the

Sixth Cireuit decision. The petition

was denied April 15, 1985.

a eee ee Sn OO ae eee eS eee

37a

KENTUCKY PRECLUSION RULES

1. Res Judicata

In Kentucky there are three conditions for the applica-

tion of res judicata: there must be (a) identical parties,

(b) identical causes of action, and (c) a decision on the

merits in the prior case. If these conditions are met, the

first action will be res judicata not only as to all claims

issues which were presented and adjudicated, but also “to

all causes that should have properly been presented.”

Newman v. Newman, 451 8S. W. 2d 417 (Ky. 1970) ; see also,

Lawlor v. National Screen Service Corporation, 349 U. S.

322, 75 S. Ct. 865, 99 L. Ed. 1122 (1955).

2. Collateral Estoppel.

In Kentucky, collateral estoppel applies where res ju-

dicata does not, because either the causes of action or the

parties are not the same. Such estoppel will apply to all

issues of fact which were actually litigated and determined.

Ward v. Southern Bell Telephone and Telegraph Co., 436

S. W. 2d 794 (Ky. 1968), overruled on other grounds, Com-

monwealth of Kentucky, Dept. of Transportation, Bureau

of Highways v. Lowsville Gus & Electric Co., 526 S. W. 2d

820 (Ky. 1975) ; see also, Lawlor, supra; Montana v. United

States, 440 U. S. 147, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979).

38a

REFUSED AMENDMENT TO

RESPONDENTS’ COMPLAINT

JEFFERSON CIRCUIT COURT

FOURTH DIVISION

No. 81 CI-09925

Unitep Kentucky Bank (formerly doing

business as Louisville Trust Bank) - - Plaintiff

Vv.

KENNETH R. Georcs, et al. - - - - Defendants

MOTION TO FILE AMENDED ANSWER

AND COUNTERCLAIM

Come the defendants, by counsel, and respectfully move

the Court to allow them to amend their Answer and Coun-

terclaim heretofore filed in this action to include as an

affirmative defense the following:

AFFIRMATIVE DEFENSE

“Plaintiff fraudulently induced the defendants to enter

into a contractual relationship between the parties and vign

the notes in question in that the plaintiff, before defendants

made any promissory notes, plaintiff [sic] United Kentucky

Bank and its employees, agents and servants were pos-

sessed of no reasonable expectation that the prime rate

of said bank would ever exceed the absolute maximum 12%.

This representation was made by plaintiff United Ken-

tucky Bank acting through its agents, servants and em-

ployees, in order to induce defendants to make the prom-

issory notes payable to plaintiff, United Kentucky Bank,

including the variable interest rate.

“Said representation was made by plaintiff UKB, act-

ing through its agents, servants and employees in response

39a

to inquiry from defendants to plaintiffs UKB, its agents,

servants and employees, made in order to know the maxi-

mum limit within which defendants could reasonably ex-

pect the interest rates on the promissory notes to vary.

Defendants relied on the truth of the aforesaid represen-

tation by plaintiff UKB, acting through its agents, servants

and employees in agreeing to make the promissory notes.

Without the aforesaid representation to defendants that,

as a matter of fact, it would be unreasonable for defend-

ants to expect the prime rate of plaintiff UKB to ever

exceed twelve (12%) percent, defendants never would have

made the promissory notes.”

In all other respects, defendants would reiterate and

reaffirm the Answer, Supplemental Answer, and Counter-

claim heretofore permitted filed.

Parrish & Mulrooney

By Larry Parrish

First Tennessee Building

Memphis, Tennessee 38103-2785

(901) 526-7777

and

Amshoff & Amshoff

By (s) Theodore H. Amshoff, Jr.

Theodore H. Amshoff, Jr.

1445 Starks Building

Louisville, Kentucky 40202

(502) 582-3500

Counsel for Defendants

40a

CERTIFICATE

I hereby certify that a copy of the foregoing was served

by hand delivery this 21st day of October 1982, to Richard

Frockt, Esq., Attorney for Plaintiff, Kentucky Home Life

Building, Louisville, Kentucky.

(s) Theodore H. Amshoff, Jr.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.