CSX Transportation Can Pursue RICO Claims Alleging Phony Asbestosis Suits

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

A provider of rail-based transportation services (CSX Transportation, Inc.) sufficiently alleged RICO violations by three lawyers and a doctor, all of whom allegedly orchestrated a scheme to inundate CSX with thousands of asbestos-related occupational illness claims throughout the state of West Virginia, the federal district court in Wheeling, West Virginia, has ruled.

The complaint asserted more than abuse of process or malicious prosecution because the pleadings described a complex scheme involving activities that went beyond the filing of eleven fraudulent claims.

Mail and Wire Fraud

The predicate acts alleged by CSX involved mail and wire fraud, including the filing and service of mass lawsuits and all of the actions taken by the lawyer defendants to generate medical evidence in support of their fraudulent asbestosis claims. The lawyer defendants’ characterization of these filings and mailings as “routine litigation activity” was contrary to CSX’s allegations.

CSX alleged that the three lawyers: (1) gained access to potential clients through unlawful means; (2) retained clients and procured medical diagnoses for them through intentionally unreliable mass screenings; (3) prosecuted clients’ claims using dishonest, fraudulent, and deceptive tactics; and (4) fabricated and prosecuted asbestosis claims with no basis in fact, and did so using mass lawsuits in overburdened courts in an effort to deprive CSX of access to meaningful discovery, which in turn concealed the fraudulent claims and leveraged higher settlements based on the threat of mass trials.

The court concluded that these allegations were sufficient to support the inference that each of the lawyer defendants knew that the mails were being used to further their scheme.

Heightened Pleading Standard for Fraud

The predicate acts of mail and wire fraud were alleged with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure, which required fraud plaintiffs to identify the time, place, and contents of false representations, as well as the identity of the persons who made the misrepresentations and what they obtained thereby.

According to the court, CSX adequately identified: (1) the date when each fraudulent claim was filed and the court in which it was filed; (2) the person who signed each complaint and caused it to be filed; (3) the circumstances surrounding the service of each complaint on CSX; and (4) the relevant portions of each complaint that was fraudulently filed.

Injury

CSX sufficiently pled an injury to its business or property by reason of the defendants’ alleged racketeering activities, the court determined. The company alleged that it was forced to expend substantial sums of money and resources in order to process, defend, and settle “deliberately fabricated claims” that never should have been filed. Its complaint described a direct relationship between the lawyer defendants’ fraudulent claims and CSX’s need to “expend resources” to respond to those claims.

Accordingly, CSX properly alleged an injury as the direct result of the defendants’ fraudulent claims.

Pattern of Racketeering: Relatedness

For predicate acts to be related, they must have the same or similar purposes, results, participants, victims, or methods of commission, or must otherwise be interrelated by distinguishing characteristics. In this case, the predicate acts of mail and wire fraud involved the same participants (the lawyer and doctor defendants); the same victim (CSX); the same alleged purpose (to defraud CSX through the manufacturing, filing, and prosecution of fraudulent asbestosis claims); and similar methods of commission (the addition of fraudulent claims to mass lawsuits that were filed in the same overburdened court system and filed motions to compel the mandatory mass mediation of those claims).

The relatedness analysis in this case depended on whether the predicate acts were defined as the eleven fraudulent asbestosis claims that the lawyer defendants filed, or whether the mass suits themselves were considered predicate acts. Eleven fraudulent claims was a small percentage of the total number of claims that composed the mass lawsuits alleged in CSX’s complaint. The lawyer defendants argued that this isolated conduct—a mere 0.2% of the asbestosis claims filed by their law firm against CSX—did not create a pattern of racketeering activity.

The predicate acts alleged in CSX’s complaint, however, arguably encompassed more than just the eleven fraudulent claims. CSX asserted that the lawyer defendants “deliberately filed … mass lawsuits in overburdened courts to deprive CSX[] of access to meaningful discovery, which in turn concealed fraudulent claims and leveraged higher settlements based on the threat of mass trials.” The fact that only some of the lawsuits filed against CSX were fraudulent did not negate the argument that the mass lawsuits were filed as part of a larger plan to conceal the fraudulent claims, the court explained.

Pattern of Racketeering: Continuity

CSX alleged that “the predicate acts were continuous in that they occurred on a regular basis.” It also alleged facts indicating that the lawyer defendants continued to prosecute their fraudulent claims even after CSX had filed its original amended complaint in this case. The calculated and deliberate strategy of the lawyer defendants to participate in and conduct the affairs of the lawyers’ firm through a pattern and practice of unlawful conduct, as described in the complaint, indicated that the filing of fraudulent lawsuits was a part of the firm’s regular business practice, according to the court. Taken together, these facts, if proven, established a threat of continuing racketeering activity, and therefore open-ended continuity.

The decision is CSX Transportation, Inc. v. Gilkison, CCH RICO Business Disputes Guide ¶12,207.

Further information regarding CCH RICO Business Disputes Guide appears here

Employees’ Civil RICO Claim Did Not Allege Wage Fraud by Healthcare Providers

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

RICO claims predicated on wire fraud and forced labor could not proceed against a health care consortium that allegedly engaged in a scheme to obtain free labor and services from employees by cheating them out of their wages and overtime pay, the federal district court in Central Islip, New York, has ruled. The employees failed to sufficiently allege the predicate acts of mail and wire fraud.

Wire Fraud

Employees of the consortium’s health care facilities alleged that their paychecks were wired to them and that the wirings included false representations stating that they were properly compensated for all of the time they worked. According to the employees, the wire payments “actually represented an amount less than the full amount of wages” they earned. Nevertheless, the employees were fully aware of the number of hours they had worked. The wire payments thus would not have furthered the consortium’s scheme, the court concluded. Rather, the payments would have put the employees on notice of the scheme by revealing their employers’ failure to fully compensate them for the hours they had worked. The employees’ wire fraud claim was therefore unavailing.

Forced Labor

The employees alleged that their employers threatened “serious financial harm” by telling them that their employment would be in jeopardy if they failed to complete all of their assigned tasks. They further alleged that they were forced to work, “out of fear of losing their jobs,” during meal breaks, before and after scheduled shifts, and during training sessions. Finally, the employees alleged that they feared “reputational harm” for failing to perform the required labor and services.

To the extent that their forced labor claims were premised on coercive conduct that forced the employees to work overtime without pay, the claims were clearly subsumed within their Fair Labor Standards Act claim and thus were preempted. To the extent that the claims were predicated on conclusory allegations that the employers had procured their labor by threatening to fire them, or by berating them in public for not finishing their work, the allegations did not state a claim under the forced labor statute, according to the court.

The employees failed to cite a single case that supported the novel theory that threatening to fire an at-will employee or berating an employee in public constituted “forced labor.”

The decision is DeSilva v. North Shore-Long Island Jewish Health System, Inc., CCH RICO Business Disputes Guide ¶12,183.

Alleged Horse-Breeding Scheme May Have Violated Federal RICO Law

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Investors could proceed with civil RICO claims against defendants that allegedly engaged in a fraudulent investment scheme that involved the leasing of thoroughbred mares for a single breeding season, the federal district court in Lexington, Kentucky, has ruled.

The defendants unsuccessfully argued that the plaintiffs were required to allege that each defendant had personally made misrepresentations or had used the mails or wires in order state a claim. They were unsuccessful, as well, in their argument that the plaintiffs did not allege a valid “investment” claim under RICO §1962(a).

Mail, Wire Fraud

Although the U.S. Court of Appeals for the Sixth Circuit required plaintiffs to identify with specificity the actions that each defendant had taken in furtherance of an alleged fraud, the mail and wire fraud statutes did not require a showing that each defendant had personally made a misrepresentation, the court explained.

To plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff had to allege only that each RICO defendant had participated in a scheme to defraud “knowing or having reason to anticipate [that] the use of the mail or wires would occur and that each such use would further the fraudulent scheme.”

Investment of Racketeering Income

The defendants unsuccessfully argued that the plaintiffs failed to plead a valid “investment” claim under RICO §1962(a).

According to the defendants, the plaintiffs failed to allege that specified defendants had used or invested income from a pattern of racketeering activity to acquire an interest in, or to operate an enterprise engaged in, interstate commerce.

The plaintiffs, however, “clearly alleged” that the specified defendants had invested income from their racketeering activity (the proceeds they received from the mare leases) into a business that was used to facilitate the cover up of the alleged fraud, according to the court.

The decision in ClassicStar Mare Lease Litigation will appear at CCH RICO Business Disputes Guide ¶12,106.

Further information regarding CCH RICO Business Disputes Guide is available here.