Thursday, January 10, 2008

High Court to Review Reliance Requirement for Mail Fraud-Based Civil RICO Claims

This posting was written by Sonali Oberg, Editor of CCH RICO Business Disputes Guide.

The U.S. Supreme Court will review the question of whether a person asserting a civil RICO claim predicated on acts of mail fraud must plead and prove reliance on alleged misrepresentations.

At issue is a holding by the U.S. Court of Appeals in Chicago that purchasers of a tax lien had standing to bring a RICO claim against a competitor who defrauded a county treasurer's office by engaging in a scheme to circumvent the treasurer's bidding rules during a tax lien auction. (Phoenix Bond & Indemnity Co. v. Bridge, No. 06-1160, decided February 20, 2007)

The treasurer's office promulgated a bidding rule whereby a “tax buying entity” was required to submit bids in its own name, and no “related entity” may bid. A “related entity” was any other person or firm that (1) had a shareholder, partner, principal, or officer in common with the “tax buying entity” or (2) had a contractual relationship with the “tax buying entities.”

The purchasers claimed that the competitor violated the rule by arranging for related firms to bid and that, as a result, the competitor obtained an extra portion of profitable liens. They alleged that the competitor had engaged in the operation of an enterprise through a pattern of racketeering activity (namely, mail fraud) in violation of the Racketeer Influenced and Corrupt Organizations Act (18 U.S. C. §§1961, et seq.). The asserted mail fraud was based on mailings undertaken in the tax-sale process, which did not involve the purchasers.

The federal district court in Chicago ruled that the purchasers lacked standing to assert RICO claims because they “were not the recipients of the alleged misrepresentations and, at best, were indirect victims of the alleged fraud.” The purchasers were not “in the class of individuals protected by the mail fraud statute, and therefore [were] not within the ‘zone of interests’ that the RICO statute protects.”

The appellate court reversed the district court, concluding that the purchasers had standing because they sustained an injury in fact, the injury was proximately caused by the defendant, and the injury could be redressed by damages. Extra bids submitted by the related firms reduced the purchaser's chance of winning any given auction, and the loss of a valuable chance was a real injury.

Although the purchasers were not the recipients of the competitors' misrepresentations, the purchasers were direct victims of the fraudulent representations and would be within the zone of interests protected by the RICO statute, the appeals court ruled. The court followed its own previous decisions and those of three other circuits that “the direct victim may recover through RICO whether or not it is the direct recipient of the false statements.”

The appeals court also rejected a contention that the purchasers were not in the zone of interest protected by the mail fraud statute because they were not “taken in” by any false statement. “That’s just a different take on proposition that only recipients of the untruth have a remedy.” The zone of interest test requires that the injury must be direct, rather than derivative. A requirement that the plaintiff must rely on a false statement is not supported by the text of either the federal mail fraud statute or RICO, the appeals court ruled.

In its petition for review, the defendants challenged this last point, asserting (1) that the majority of the Circuits that have addressed the issue have held that a plaintiff asserting a civil RICO claim predicated on mail fraud must plead and prove reliance; (2) that the reliance question was directly at issue in the case; (3) that requiring a showing of reliance was consistent with the civil RICO remedy; and (4) that a reliance requirement is an appropriate limitation on the application of civil RICO statute.

The Supreme Court review is limited to the following question: “Whether reliance is a required element of a RICO claim predicated on mail fraud and, if it is, whether that reliance must be by the plaintiff.”

The petition is Sabre Group, LLC v. Phoenix Bond & Indemnity Co., US S.Ct. Dkt. 07-210, cert. granted January 4, 2008.

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