Tuesday, June 10, 2008

Reliance by Plaintiff Not Required Element of RICO Claim: U.S. Supreme Court

This posting was written by William Zale.

In a private RICO suit predicated on mail fraud, property tax lien auction bidders were not required to show that they relied on alleged misrepresentations by successful bidders, the unanimous U.S. Supreme Court has ruled.

The successful bidders allegedly obtained a disproportionate share of liens by filing false attestations of compliance with a county’s rule requiring that each buyer submit bids in its own name. The rule was designed to ensure that liens were apportioned fairly when bidding resulted in a tie. To further their scheme, the successful bidders allegedly used the mail on numerous occasions to send required notices to property owners.

Conduct of Enterprise Through Mail Fraud

By allegedly conducting their enterprise through a pattern of mail fraud, the successful bidders would have violated RICO Sec. 1962(c). As a result, the complaining bidders allegedly lost the opportunity to acquire valuable liens. Nothing on the face of the relevant statutory provisions imposed a requirement of first-party reliance, the Court observed.

No showing of reliance was required to establish that a person violated Sec. 1962(c) by conducting an enterprise’s affairs through a pattern of racketeering activity predicated on mail fraud, according to the Court. In addition, it was difficult to derive a first-party reliance requirement from Sec. 1964(c), RICO's private suit provision, which states simply that “[a]ny person injured in his business or property by reason of a violation of section 1962” may sue to recover treble damages and attorney’s fees.

Mail Fraud v. Common Law Fraud

The successful bidders contended that RICO should be read to incorporate the rule that only a recipient of a fraudulent misrepresentation may recover for common law fraud and that the recipient may do so only if he relied on the misrepresentation in acting or refraining from action.

However, Sec. 1962(c) did not use the term “fraud.” The key term—“racketeering activity”—was defined by Congress to include not fraud but mail fraud—a statutory offense unknown to the common law, the Court pointed out. An indictable act of mail fraud was not a fraudulent misrepresentation but rather the use of the mails with the purpose of executing or attempting to execute a scheme to defraud.

Causation of Injury

The successful bidders next argued that proof of first-party reliance in a claim predicated on mail fraud was needed to establish causation of injury under Sec. 1964(c). The Court rejected this contention as an attempt to let the first-party reliance element in through the back door by holding that the proximate cause analysis under RICO must precisely track the proximate cause analysis of a common law fraud claim.

The complaining bidders could establish proximate causation if their alleged injury was a foreseeable and natural consequence of the successful bidders' alleged scheme to obtain more liens for themselves. While a RICO plaintiff alleging injury by reason of a pattern of mail fraud might have to establish at least third-party reliance in order to prove causation, this did not make first-party reliance indispensable in proving proximate causation, the Court concluded.

The June 9 decision, delivered by Justice Thomas, is Bridge v. Phoenix Bond & Indemnity Co. The opinion will be reported in CCH RICO Business Disputes Guide.

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