Opposition Brief — Madden v. Gluck

~— Supreme Court, U.S,

C FILED

No. 86-1923 JUL 21 per

PRNIOL, JR,

CLERK

IN THE

Supreme Court of the United States

OcTOBER TERM, 1986

KEVIN P. MADDEN, CHARLES J. OSWALD, and

RICHARD W. Kurre, Individually and as

Representatives of a Class of Persons,

Petitioners,

VS.

Jerrrey M. Giuck, DEBRA MCALEAR GLUCK

and LANDMARK ST. Louis BANK, N.A..,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF FOR RESPONDENT LANDMARK

ST. LOUIS BANK IN OPPOSITION

Davip W. HARLAN

(Counsel of Record)

THOMAS P. HOHENSTEIN

GALLOP, JOHNSON & NEUMAN

101 South Hanley Road,

Suite 1600

St. Louis, Missouri 63105

(314) 862-1200

Attorney for Respondent,

Landmark St. Louis Bank

St. Louis Law Printing Co., Inc., 411 No. Tenth Street 63101 314-231-4477

QUESTIONS PRESENTED FOR REVIEW

Whether Petitioners stated a cause of action under RICO

where they sought to characterize a single, isolated

fraudulent episode as a ‘‘pattern’’ by alleging each use of

the mails or wires in furtherance of that single episode as

separately chargeable fraudulent acts.

ili

TABLE OF CONTENTS

Page

Questions Presented for Review................0005: i

er Sea Ce eanbecgeascceccesceon ill

Table of Authorities eC rceGesessaveeseusves ses iv

Opinions ee eee 1

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To ddct se ccccccassspesscsencees 2

Reason for Denying the Writ ..............ccceceees 4

I. The Eighth Circuit, Along With Ali The

Other Circuits, Applies The Same ‘‘Continui-

ty Plus Relationship’’ Test To The ‘‘Pattern’’

8 Er ee 4

II. The Decision Below Does Not Raise A Ques-

tion of Exceptional Importance Because The

Complaint Does Not Allege A Pattern Of

Racketeering Under The Reasoning Applied

In The Allegedly Conflicting Decisions ...... 9

ee ce eeas awuesesaasuade 10

iv

TABLE OF AUTHORITIES

Cases:

Armco Industrial Credit Corp. v. SLT Warehouse Co.,

Fe ee ls BO 66.5 de iccenncccsacces

Bank of America National Trust & Savings Association

v. Touche Ross & Co., 782 F.2d 966 (llth Cir.

Beck v. Manufacturers Hanover Trust Co., 820 F.2d

IE in cbc cnscdeasisseaniseser ns

Condict v. Condict, 815 F.2d 579 (10th Cir. 1987)......

Cowan v. Corley, 814 F.2d 223 (Sth Cir. 1987).........

Holmberg v. Morrisette 800 F.2d 205 (8th Cir. 1986),

cert. denied, 107 S.Ct. 1953 (1987) ..............

International Data Bank, Ltd. v. Zepkin, 812 F.2d 149

Ss DK chcu ya udabs s8a6sahaecaabanb de>

Madden v. Gluck, 636 F.Supp. 463 (E.D. Mo. 1986),

aff’d, 815 S.W.2d 1163 (8th Cir. 1987)...........

Marks v. Pannell Kerr Forster, 811 F.2d 1108 (7th Cir.

ers nde eee eee :

Montesano v. Seafirst Commercial Corp. 818 F.2d 423

A mr er rer rear

R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (Sth

Se Ds durin d ddbcbeckwkaeateeenseearease

Roeder v. Alfa Industries, Inc., 814 F.2d 22 (lst Cir.

ars i hirk ih eackthaewa nn cca eee aaah oa

Ross v. Rice, Fed. Sec. L. Rep. (CCH) 492,948 (N.D.

Me Ns bs eed ddkd eke eA chanss ces panne

Page

10

5, 8

Sheftelman v. Jones, 636 F.Supp. 263 (N.D.Ga. 1986). .

Schreiber Distributing Co. v. Serv-Well Furniture Co.,

806 F.2d 1393 (9th Cir. 1986) ................8..

Sedima S.P.R.L. v. Imrex, 473 U.S. 479 (1985) ........

Skycom Corp. v. Telstar Corp., 813 F.2d 810 (7th Cir.

a kat waawinn vas oh oak tndeek es weetiioaen

Smoky Greenhaw Cotton Co., Inc. v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 785 F.2d 1274 (Sth

Cae: WE Kk eS eh cs ik cddiveranssaaeews

Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir. 1986)

Torwest DBC, Inc. v. Dick, 810 F.2d 925 (10th Cir.

i, EPP EE PEE OE PET FLEE ET TPC a ee

United States v. Ianniello, 808 F.2d 184 (2nd Cir. 1986),

cert. denied, 55 U.S.L.W. 3849 (U.S. June 23,

ery seamen yi rent Henne Serer ta im ARE, MER

Washington v. Yakima Indian Nation, 439 U.S. 463

GFE kako wscddsebdnsnkuaeacaeeeree eens

8

6, 8

No. 86-1923

IN THE

Supreme Court of the United States

OcTOBER TERM, 1986

KEVIN P. MADDEN, CHARLES J. OSWALD, and

RICHARD W. Kurre, Individually and as

Representatives of a Class of Persons,

Petitioners,

VS.

JerFREY M. Giuck, DEBRA MCALEAR GLUCK

and LANDMARK St. Louis BANK, N.A.,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF FOR RESPONDENT LANDMARK

ST. LOUIS BANK IN OPPOSITION

OPINIONS BELOW

The opinion of the Court of Appeals (Pet. App. A-1) is

reported at 815 F.2d 1163 (8th Cir. 1987). The opinion of the

District Court (Pet. App. A-6) is reported at 636 F.Supp. 463

(E.D.Mo. 1986).

JURISDICTION

The Court of Appeals entered judgment on February 11,

1986. The Court denied the Petition for rehearing on March 9,

as, pe

1987. The Petition for writ of certiorari was filed on June 3,

1987. The court’s jurisdiction is invoked under 28 U.S.C.

1254(1).

STATEMENT OF THE CASE

Respondent Landmark St. Louis Bank (‘‘Landmark’’)', with

the exception of the following clarifying statements, adopts the

statement of the case set forth by Petitioners together with the

factual statements set forth in the opinions of the Court of Ap-

peals and the District Court (Pet. at 4-5; Pet. App. at A-2, A-6

to A-7).

The complaint alleges that the Glucks, while serving as of-

ficers, directors and publishers of the St. Louis Globe-

Democrat, Inc. (the ‘‘Globe’’), devised a scheme to defraud

Globe employees such as plaintiffs and trade creditors of goods

and services by creating an illusion of solvency. The Glucks are

also alleged to have diverted Globe assets for personal enrich-

ment. The Glucks accomplished the scheme by paying creditors

and employees for goods and services with Globe checks drawn

on accounts with insufficient funds maintained at Landmark.

The Glucks also furthered the scheme through the alleged

falsification of the Globe’s financial statements and accounting

books and records, and delivering the same to creditors.

Petitioners allege that the Gluck’s objective after diverting

the Globe’s assets, was ‘‘to sell their Globe shares for the max-

imum price obtainable’. The alleged scheme was to be fully ac-

complished and terminated upon either the sale by the Glucks of

' Landmark St. Louis Bank has, since the filing of the complaint,

been merged with other banks, the successor of which is Landmark

Bank. The parent corporation of Landmark Bank is Landmark Banc-

shares Corporation. All affiliated corporations are wholly owned by

Landmark Bancshares Corporation.

— Pe

the Globe stock or the cessation of the Globe’s business by

reason of resulting insolvency.’

Landmark, beginning sometime in 1984, allegedly assisted

and participated in the Gluck’s fraudulent scheme through its

role as sole depository of the Globe’s business accounts and

through performance of routine banking functions. Petitioners

allege that ‘‘Landmark knew, or in the exercise of prudent

business and banking practices, should have known that the

Glucks were perpetrating their bad check scam...’’ and were

looting and diverting its assets to their own benefit. It is further

alleged that Landmark as agent for the Glucks knew or should

have known that it would substantially assist the Glucks in com-

mitting the fraud by offering its banking facilities to the Glucks

for use in the scheme, by profiting therefrom, and by taking no

steps to prevent the Glucks from continuing the activities.

? The Globe filed for Chapter 11 on August 19, 1985. The Order for

Relief was issued on September 26, 1985. Petitioners filed the com-

plaint on November 14, 1985.

=

ARGUMENT

I. The Eighth Circuit, Along With All The Other Circuits,

Applies The Same ‘‘Continuity Plus Relationship’’ Test

To The ‘‘Pattern’’ Element of RICO.

~ The Petitioners contend that the Court of Appeals failed to

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

473 U.S. 479 (1985) where the Court discussed the meaning of

the term ‘‘pattern of racketeering activity.’’ Jd. at 496 n.14.

They also argue that the Court of Appeals’ analysis is contradic-

tory to the analysis of other courts of appeals.

In Sedima, the Court noted that the RICO statute requires

proof that the violator conducted an enterprise through a pat-

tern of racketeering activity. Jd. at 496. The Court then ex-

plained that proof of a ‘‘pattern of racketeering’’ requires more

than just the proof of two isolated unlawful acts. Instead the

Court stated, because the statute was not aimed at the ‘‘isolated

offender’’, the existence of a ‘‘pattern of racketeering activity”’

requires a showing of ‘‘continuity plus relationship’”’ in the com-

mission of the alleged predicate acts of racketeering activity. /d.

at 496 n.14.

Since Sedima, nearly every court of appeals which has con-

sidered the ‘‘pattern’’ element has recognized that allegations of

two or more predicate acts of racketeering activity, though

necessary, may not be sufficient to satisfy both the

*‘continuity’’ and the ‘‘relationship’’ prongs of the pattern re-

quirement. Here, the Court of Appeals focused on the ‘‘con-

tinuity’’ prong. It held that the complaint, which alleged a

single, isolated fraudulent scheme failed sufficiently to allege a

‘*pattern’’ where the only predicate acts alleged — the use of the

mails and wires — were components of the single scheme. In

reaching this conclusion, the Court of Appeals applied the

“continuity plus relationship’’ test suggested in Sedima and

determined that the isolated scheme alleged did not meet the test

of continuity because it was not alleged to be continuing or to

have occurred previously.

=

The Eighth Circuit has consistently applied the ‘‘continuity

plus relationship’’ inquiry suggested by Sedima with particular

emphasis on the continuity prong. In line with the other cir-

cuits, the Eighth Circuit has held that allegations of a single

ongoing fraudulent scheme could satisfy the continuity prong of

the pattern test where the threat of continuing activity is suffi-

ciently alleged. In Superior Oil Co. v. Fulmer, 785 F.2c 252,

257 (8th Cir. 1986), the court stated ‘‘that proof of a threat of

continuing racketeering activities in the future could, in com-

bination with ongoing acts of racketeering, be sufficient to

establish a ‘pattern of racketeering’ ’’. Jd. at 257. A pattern

can also be established, the court suggested, by allegations that

the defendants have ‘‘engaged in like activity in the past’’.

Holmberg v. Morrisette, 800 F.2d 205, 210 (8th Cir. 1986).

The Petitioners suggest that the Eighth Circuit employs a

sharply different approach from that employed by the majority

of other circuits. Respondent suggests that there is no such con-

flict in approach and that, in any event, any distinction would

make no difference in this case. The Petitioners contend that

the Court of Appeals requires that a plaintiff allege different

fraudulent schemes before the plaintiff can successfully allege a

‘‘pattern’’ of engaging in the predicate acts of mail or wire

fraud. In making this argument, the Petitioners overlook the

holdings of Superior Oil and Holmberg that allegations of

predicate acts undertaken pursuant to a single fraudulent

scheme can satisfy the ‘‘pattern’’ element where it is also alleged

that the single fraudulent scheme is ongoing, open ended, con-

tinuous in nature, and, in particular, that it harbors a threat of

continuity activity. See, Ross v. Rice, Fed. Sec. L. Rep. (CCH)

492,948 (N.D.Ala. 1986) (stating that all courts responding to

this Court’s invitation in Sedima ‘‘have uniformly held that

mere allegation or proof of two or more predicate acts as part of

a single scheme is insufficient if there is no demonstrated threat

of continuity.’’) Accordingly, schemes that are distinct in pur-

pose and necessarily finite in duration do not satisfy the ‘‘con-

tinuity’’ requirement.

— Pn

A survey of the opinions rendered by the various circuits

demonstrates that the Eighth Circuit’s holdings in Superior Oil

and Holmberg, rather than conflicting, are consistent with

prevailing judicial attitudes.

In Roeder v. Alfa Industries, Inc., 814 F.2d 22 (ist Cir. 1987),

the First Circuit held that a single fraudulent scheme might

satisfy the ‘‘continuity’’ requirement under Sedima where the

predicate acts ‘“‘threaten to be more than an_ isolated

occurrence’’ and harbor a ‘‘threat of continuing activity’’. /d.

at 30-31.

Similarly, the Second Circuit holds that the plaintiff must

allege commission of ‘‘at least two acts that have the purpose of

furthering a continuing criminal enterprise. ..’’, United States

v. lanniello, 808 F.2d 184, 192 (2nd Cir. 1986), cert. denied, 55

U.S.L.W. 3849 (U.S. June 23, 1987). A ‘‘continuing criminal

enterprise’ which has a single fraudulent purpose satisfies the

continuity requirement where it exists to perpetrate a ‘‘fraud

continuing indefinitely’’ and which has ‘‘no obvious ter-

minating goal or date’’. Jd. at 191-92. Accord, Beck vy.

Manufacturers Hanover Trust Co., 820 F.2d 46 (2nd Cir. 1987)

(holding that an alleged enterprise having ‘‘one straightforward,

shortlived goal. . .is not sufficiently continuing to constitute an

‘enterprise’ ’’....)

The Fifth Circuit decision in R.A.G.S. Couture, Inc. vy.

Hyatt, 774 F.2d 1350 (Sth Cir. 1985), also cited by Petitioners as

a circuit opinion in conflict with the Eighth Circuit, has been

sapped of all vitality in its own circuit and clearly presents no

viable conflict with the Eighth Circuit.’

* The precedential value of R.A.G.S. is questionable because it was

decided only three months after Sedima, during the genesis of the

post-Sedima review of the pattern requirement and has no analysis of

“‘continuity’’ as suggested in Sedima.

R.A.G.S. is also unpersuasive because in two post-R.A.G.S. deci-

sions, the Fifth Circuit ignored it. See, Smoky Greenhaw Cotton Co.

rs aoe

In the Seventh Circuit, the continuity element of a ‘‘pattern

of racketeering’’ is adequately alleged where the predicate acts

are sufficiently separate in time that they may be viewed as

separate transactions. Skycom Corp. v. Telstar Corp., 813 F.2d

810, 818 (7th Cir. 1987); Marks v. Pannell Kerr Forster, 811

F.2d 1108, 1111 (7th Cir. 1987). That Circuit, however, also

holds that continuity requires allegations giving ‘‘some indica-

tion of a ‘threat of continuing activity’ by the defendants...’’.

Marks, supra, 811 F.2d at 1111.

The Fourth, Ninth and Tenth Circuits, not mentioned by

Petitioners, also recognize that where one fraudulent scheme is

alleged, it must also be a continuous scheme and suggest a threat

of continuing activity in order to satisfy the continuity test of

Sedima. See, International Data Bank, Ltd. v. Zepkin, 812

F.2d 149, 154-55 (4th Cir. 1987) (stating that multiple predicate

acts to perpetrate a single fraudulent scheme will not constitute

a pattern of racketeering, except where a large continuous

scheme is alleged); Schreiber Distributing Co. v. Serv- Well Fur-

niture Co., 806 F.2d 1393, 1399 (9th Cir. 1986) (requiring allega-

tions of a threat of continuing activity in order to satisfy the

‘continuity plus relationship’’ test); Torwest DBC, Inc. v.

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 785 F.2d 1274,

1280-81, n.7 (Sth Cir. 1986) (expressing no opinion as to whether the

Fifth Circuit would follow the lead of courts requiring a showing of

two fraudulent schemes, ongoing schemes, or the threat of continuing

activity); Cowan v. Corley, 814 F.2d 223, 226-27 (Sth Cir. 1987)

(deciding the pattern issue in light of Sedima and without reliance on

R.A.G.S.). More recently, in Montesano v. Seafirst Commercial

Corp., 818 F.2d 423 (Sth Cir. 1987) the court questioned whether the

treatment accorded the pattern requirement in R.A.G.S. was binding

on the Circuit. Jd. at 425. In any event, the panel urged that

R.A.G.S. be overturned by the Circuit, en banc, and replaced by a test

which would recognize that ‘‘[a] scheme to achieve a single discrete

objective does not of itself create a threat of on-going activity, even

when the goal is pursued by multiple illegal acts, because the scheme

ends when the purpose is accomplished.’’ Jd. at 426. (citing, Torwest

DBC, Inc. vy. Dick, 810 F.2d 925, 929 (10th Cir. 1987).

—_ ya

Dick, 810 F.2d 925, 928-29 (10th Cir. 1987) (holding that a

‘‘plaintiff must demonstrate some facts from which at least a

threat of ongoing illegal conduct may be inferred’’ and “‘[a]

scheme to achieve a single discrete objective does not in and of

itself create a threat of ongoing activity, even when the goal is

pursued by multiple illegal acts, because the scheme ends when

the purpose is accomplished.’’); Condict v. Condict, 815 F.2d

579, 584-85 (10th Cir. 1987) (activity that is bounded in time

does not constitute a ‘‘pattern’’).

Finally, the Eleventh Circuit in Bank of America National

Trust & Savings Association v. Touche Ross & Co., 782 F.2d

966 (11th Cir. 1986), also ‘‘expressly adopted the threat of con-

tinuing activity as a prerequisite to finding a pattern.”’

Scheftelman v. Jones, 636 F.Supp. 263, 267 (N.D.Ga. 1986),

(citing, Touche Ross, supra, 782 F.2d at 971).

The preceding review demonstrates that each circuit, in-

cluding the Eighth Circuit, has considered and adopted the

‘‘continuity plus relationship’’ analysis suggested by this Court

in Sedima and that all courts hold that the ‘‘continuity’’ prong

also requires an allegation that where a single fraudulent scheme

is alleged, it must be ongoing, include separate fraudulent tran-

sactions, and harbor a threat of continuing activity.

This Court recently denied petitions for writs of certiorari in

two cases which presented the same issue as that presented here.

Holmberg v. Morrisette, 800 F.2d 205 (8th Cir. 1986), cert.

denied, ____ U.S. ___, 107 S.Ct. 1953 (1987); United States v.

Tanniello, 808 F.2d 184 (2nd Cir. 1986), cert. denied, 55

U.S.L.W. 3849 (U.S. June 23, 1987). Interestingly, in Jan-

niello, the Solicitor General’s Office was of the view that there

was no conflict between the Eighth Circuit and the others on

this question. Brief for the United States In Opposition at 6-8,

Ianniello, supra. This petition raises no new questions not rais-

ed by petitioners in Holmberg and Janniello. No different result

is warranted here.

A, Me lh erie

—

II. The Decision Below Does Not Raise A Question Of Excep-

tional Importance Because The Complaint Does Not

Allege A Pattern Of Racketeering Under The Reasoning

Applied In The Allegedly Conflicting Decisions

The fraudulent scheme alleged by Petitioners would not,

under the analysis applied by any of the circuits, amount to a

pattern of racketeering activity because the conduct does not

satisfy the ‘‘continuity’’ prong of the Sedima test under any of

the analyses applied. Thus, this case is not an appropriate vehi-

cle for review.

The scheme alleged by Petitioners was found by the Court of

Appeals to be a single scheme, because it was not open ended,

ongoing or continuous. Its admittedly limited objective was to

prolong only the life of the Globe beyond its actual insolvency.

By definition and design, the alleged fraudulent scheme involv-

ed only the Globe and would necessarily terminate upon the

Globe’s sale or insolvency. The alleged scheme in fact ended

before the Complaint was filed.

This isolated conduct ought not to satisfy any circuits’ for-

mulation of the ‘‘continuity’’ requirement because, as found by

the Court below, it constituted only a single, isolated alieged

scheme, which was bounded in time and scope, distinct in pur-

pose and harbored no threat of continuing activity. Lastly, no

one alleged that Respondents had engaged in similar activities in

the past or that they were engaged in like activities elsewhere.

Were this other than an isolated scheme, and therefore within

RICO’s purview, the plaintiffs would have alleged that the

Gluck’s operated other businesses in like manner or that Land-

mark continuously pursued such unlawful acts with the Glucks

or other customers. The allegations here are thus in marked

contrast with the allegations in Janniello, supra, which involved

distinct business entities involved in nearly identical acts on a

continuous basis.

=— =

The decision below was, therefore, correct under any

analysis.’

CONCLUSION

The Petition for writ of Certiorari to the Eighth Circuit

should be denied.

Respectfully submitted,

DAVID W. HARLAN

(Counsel of Record)

THOMAS P. HOHENSTEIN

GALLOP, JOHNSON & NEUMAN

101 South Hanley Road

Suite 1600

St. Louis, Missouri 63105

(314) 862-1200

Attorney for Respondent,

Landmark St. Louis Bank

> The defective allegations of pattern are but one of the fatal defi-

ciencies in the Complaint raised by Respondents below. Petitioners

allege that Landmark knew or should have known of the fraud and

failed to take steps to prevent it. It is well settled that where, as here, a

RICO action is premised upon alleged acts of mail or wire fraud, the

plaintiff must allege and prove specific criminal intent to defraud,

mere knowledge being insufficient. See, e.g., Armco Industrial Credit

Corp. v. SLT Warehouse Co., 782 F.2d 475, 485 (Sth Cir. 1986).

Although this argument was not addressed or relied upon by either

court below, it provides adequate independent legal grounds for affir-

ming the dismissal of the complaint against Landmark. Washington

v. Yakima Indian Nation, 439 U.S. 463, 476, n.20 (1979).