Appeals Court Rules that Illegal Activity Must Continue at Least One Year to Establish Racketeering
How long must illegal behavior continue before it becomes racketeering? A federal appeals court in Philadelphia recently answered that question in an alleged Ponzi scheme case.
Joseph and Gabriella Germinaro sued Fidelity National Title Insurance Company and Commonwealth Land Title Insurance Company in 2014. They claimed that the two title companies violated the federal Racketeer Influenced and Corrupt Organizations Act (RICO) by participating in a Ponzi scheme with a real estate company specializing in tax free exchanges.
The real estate exchange business had gone bankrupt and closed its doors leaving the two title companies as the only remaining defendants with money.
To best understand the rest of the story and the court’s ruling, some facts are necessary.
In 2008, the Germinaros decided to do a tax free exchange of property they owned in Pittsburgh. They used a company called LandAmerica 1031 Exchange Services (LES). These exchanges are authorized by the IRS and rely on the services of a qualified intermediary. LES was one such intermediary.
So called “tax free” exchanges or “1030 exchanges” (1031 is the section of the Tax Code that authorizes these deals) are popular with property owners looking to defer capital gains taxes.
Normally, if you sell a property for a profit, you owe a tax on the gain or profit. Section 1031 allows you to defer that gain if you purchase another property. To avoid owing the tax, you can’t have access to the sales proceeds. The intermediary holds them until the second closing takes place. (The closing on the replacement property.)
In October, the Germinaros gave LES $831,187 after the sale of a property they owned. That money was to be held by the intermediary until it could be rolled over into another property. By using an intermediary, the Germinaros deferred paying capital gains taxes.
Unfortunately, because of the 2008 financial crisis, LES was having liquidity problems. One week after taking the Germinaros’ money, LES ceased operations. They later filed for bankruptcy protection.
When the Germinaros went to close on their new property they discovered their money was gone! Ultimately the Germinaros received back $614,145 leaving them short by almost a quarter of a million dollars. They sued the two title companies (by that time, they were the only two companies left that had money).
The Germinaros didn’t claim that the title companies took their money, instead they claimed that title companies were part of a racketeering conspiracy designed to keep new money coming into LES so that they could pay out old claims.
The Germinaros say that from February 2008 until November 2008, the two title companies assisted LES in a Ponzi scheme. The alleged goal was to keep LES’ doors open until they could iron out their liquidity problems. They say that the defendants induced customers to entrust their money with LES knowing it was on the brink of insolvency. They used the money of newer customers to complete the transactions of earlier customers.
The Germinaros brought suit under several legal theories but the cornerstone of their complaint was a RICO charge. Originally passed as legal tool to fight biker gangs and organized crime, RICO has some very tough civil remedy provisions.
Many judges disfavor RICO claims but if used correctly RICO can be a powerful tool. Included in the civil remedies is a provision for triple damages, legal fees and costs of suit. Plaintiffs lawyers also like it because it imposes a much lower civil burden of proof on conduct that is otherwise criminal. You can’t use RICO in a garden variety breach of contract but in true conspiracy and fraud cases, it is ideal.
Let’s break down the important concepts in RICO. For example, Congress intended RICO to apply to long term activity. But that term isn’t defined.
To bring a RICO claim, the plaintiff (person bringing the claim) must show a pattern of “racketeering activity”. That means demonstrating certain predicate offenses such as wire fraud or mail fraud. (There are many others, mail and wire fraud are the most common).
Most business today is conducted by email, phone and wire transfers. That means wire fraud if these methods of doing business are part of the greater conspiracy.
Unfortunately for the Germinaros, the trial court dismissed their RICO claims. The Court concluded that the RICO claims failed as matter of law because the Germinaros alleged a pattern of racketeering lasting only for nine-and-a-half months, which was insufficient to establish the “continuity” requirement of a RICO violation.
To understand the court’s ruling, it is important to remember that RICO isn’t a normal litigation tool. Courts say that to prove a racketeering conspiracy, one must prove multiple acts taking place over a long period of time. In many courts, plaintiffs must show more than twelve months of illegal activity.
The statute itself is silent as to how much illegal activity must be shown or for how long it must last. We know, however, that law requires the plaintiff “must demonstrate a pattern of racketeering activity”. Proving a pattern of racketeering activity requires plaintiffs to show “that the predicate offenses are related, and that they amount to or pose a threat of continued criminal activity.
What does “related” mean? The court said, “Predicate acts are related if evidence demonstrates ‘that the criminal activities have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by
distinguishing characteristics and are not isolated events.’”
And how long must the behavior continue before it becomes racketeering? The court in Germinaro said nine and one half months isn’t enough. We know that many courts require at least 12 months.
As noted above, bringing a RICO claim is not easy. The requirements are quite complex and because so many complaints are improperly presented, courts are leery when first being presented with a new RICO complaint. In the hands of an experienced plaintiff’s lender liability lawyer, however, they can be quite effective against banks, financial institutions and their officers.
There are three takeaways from the Germinaro decisions and others like it.
First, the pattern of racketeering activity must extend at least a year. Anything else is probably a garden variety conspiracy. Those conspiracies may illegal but won’t permit triple damages and an attorney’s fee award.
Second, one needs more than just mere random criminal conduct. The predicate acts must be related. If you can tie the illegal behavior together, you have a potential RICO claim.
Finally, the illegal conduct must fall into one of the criminal statutes designated by RICO as a predicate act. Garden variety fraud doesn’t cut it. But using email /phone (wire fraud) or using the mail (mail fraud) to help facilitate the illegal behavior will give you the predicate acts if they are reasonably related.
The court didn’t exonerate the two title companies. Instead they merely ruled that they could be prosecuted civilly for racketeering. That case will unfold over the coming months.
Banks know they can outspend most customers. They often win by outspending and outlasting the people suing them.
In the American legal system, each party pays his or her own attorney’s fees. Banks have plenty of money but most small businesses and individuals don’t. Worse, most loan documents say that the borrower or bank customer is liable for the bank’s legal fees. But those agreements say nothing about the bank paying the borrower’s legal fees.
RICO levels the playing field by allowing customers to get their legal fees reimbursed by the banks if the customer wins.
Better yet, customers can receive triple damages.
There are very few lawyers willing to take on big banks. Even fewer have any experience prosecuting civil RICO cases. We are the exception. Our lender liability lawyers have many years of successfully suing banks across the United States. If you are asking, “How do I sue a bank,” call us.
To learn more about our civil RICO practice and how it can give you the winning edge in litigation, visit our Civil RICO information page. Ready to see if you have a case? Contact attorney Brian Mahany at [hidden email] or by phone at 202-800-9791. All inquiries are protected by the attorney – client privilege and kept completely confidential.
As noted elsewhere in this website, we do not accept cases where the actual loss or damages is less than $5 million. (We make exceptions especially if the case is in southeast Wisconsin.) Most cases are handled on an hourly basis with few exceptions.