Opinion
No. 98 C 8299
March 13, 2000
MEMORANDUM OPINION AND ORDER
Employers Insurance of Wausau, A Mutual Company ("Wausau") sues Prate Installations, Inc. and Michael Prate, an individual, for injuries stemming from defendants' alleged conspiracy to defraud Wausau out of the workers compensation premiums to which it was due. Defendants Prate Installations, Inc. and Michael Prate move to dismiss the count alleging a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 (c), ("RICO") (Count IV) for inadequately alleging the requisite "pattern" of racketeering demanded by RICO and inadequately alleging injury. Defendants also move to dismiss the count alleging a conspiracy to commit a RICO violation (Count V) and the count alleging a conspiracy to commit fraud (Count III). Defendants' motion is GRANTED as to all three counts.
I. FACTS
Michael Prate is the owner, president and executive supervisor of Prate Installations, a company engaged in the business of providing roofing, gutter, siding and insulation services, among others. First Amended Complaint, ¶ 3. Michael Prate is also the owner of other companies that provide similar services to Prate Installations. Id. at ¶ 9. Wausau, a mutual insurance company, provided Prate Installations, Inc. with workers compensation insurance. Id. at ¶ 1.
In 1989, Prate Installations and Michael Prate sent Wausau an application for workers compensation insurance. Id. at ¶ 7. The application stated that Prate Installations was a new business with thirteen employees performing siding, carpentry, and roofing services.Id. at ¶ 8. The application was submitted on behalf of Prate Installations only and no other related or affiliated companies. Id. at ¶ 7. The application was signed by Michael Prate, or someone on behalf of Michael Prate. Id.
Based on the application, Wausau issued annual workers compensation insurance policies to Prate Installations from 1989 to 1998. Id. at ¶ 13. Beginning in at least September, 1995, continuing through at least December, 1997, Prate installations and Michael Prate, together with others, caused at least eight injury reports to be submitted to Wausau for persons who were not employed by Prate Installations at the time of their injuries. Id. at ¶ 10. The injured employees were actually employed by one of Michael Prate's other companies at the time of their injuries. Id. Each of the false reports was transmitted to Wausau via the United States mail. Id. Michael Prate and Prate installations submitted these false injury reports and other documents to Wausau as part of their scheme to obtain workers compensation insurance at less than the proper premium amount. Id. at ¶ 12. Because Wausan was induced to pay claims for persons employed by companies other than Prate Installations, it in effect was providing insurance coverage for a greater number of workers than was disclosed to it at the time it set premiums for Prate Installations. Id. Wausau claims that as a result of the defendants' actions, it was damaged in an amount in excess of $500,000. Id. at ¶ 14.
II. Standard for Motion to Dismiss
A motion to dismiss pursuant to Rule 12(b)(6) does not test whether the plaintiff will prevail on the merits, but instead whether the plaintiff has properly stated a claim upon which relief may be granted.Pickrel v. City of Springfield. Ill., 45 F.3d 1115 (7th Cir. 1995). The court must accept as true all of the plaintiff's well-pleaded factual allegations, as well as all reasonable inferences. Id. Thus, the court will dismiss a complaint under Rule 12(b)(6) only "if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Ledford v. Sullivan, 105 F.3d 354 357 (7th Cir. 1997) (quoting Hishon v. King Spalding, 467 U.S. 69, 78, 104 S.Ct. 2229, 2232 (1984)). The complaint must state either direct or inferential allegations concerning all material elements necessary for recovery under the chosen legal theory. Glatt v. Chicago Park District, 847 F. Supp. 101, 103 (N.D. Ill. 1994). Any ambiguities are construed in favor of the plaintiff. Curtis v. Bembeneck, 48 F.3d 281, 283 (7th Cir. 1995). The court, however, need not "strain to find inferences favorable to the plaintiffs which are not apparent on the face of the complaint."Coates v. Illinois State Bd. Of Ed., 559 F.2d 445, 447 (7th Cir. 1997).
III. Analysis
A. RICO Violation
While Congress enacted RICO in order to combat organized crime, the statute was written generally so it would not be limited in application to organized crime. H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 248 (1989). A RICO plaintiff alleging a violation of§ 1962(c) must show "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima. S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985).
The Supreme Court "has attempted to give definition to the pattern requirement to forestall RICO's use against isolated or sporadic criminal activity, and to prevent RICO from becoming a surrogate for garden-variety fraud actions properly brought under state law." Midwest Grinding Company. Inc. v. Spitz, 976 F.2d 1016, 1022 (7th Cir. 1992). A plaintiff's failure to sufficiently plead the pattern requirement "rings the death knell" for RICO claims under Section 1962. J.D. Marshall Int'l. Inc. v. Redstart. Inc., 935 P.26 815, 820 (7th Cir. 1991).
Under 18 U.S.C. § 1961 (5), a pattern of racketeering consists of at least two predicate acts of racketeering committed within a ten-year period. The Supreme Court has indicated, however, that although two predicate acts of racketeering are necessary to form a pattern, two acts alone will usually not suffice. Corley v. Rosewood, 142 P.36 1041, 1048 (7th Cir. 1998) (citing H.J. Inc., 492 U.S. at 237). Rather, in addition to at least two predicate acts, a RICO plaintiff must show "that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." Id. at 1048 (quoting H.J., Inc., 492 U.S. at 239). Thus, a RICO plaintiff must show "continuity plus relationship with respect to the alleged predicates." Corley, 142 P.36 at 1048.
The relationship prong is not at issue in this case. In order to satisfy the relationship test, the predicate acts of racketeering must "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise [be] interrelated by distinguishing characteristics and not isolated events." Id. (quoting H.J. Inc., 492 U.S. at 240 (internal quotation omitted)). The defendants have not argued that the core predicate acts of filing false workers compensation claims are insufficiently related, and therefore the court moves on to consider continuity.
Continuity is "both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." H.J., Inc., 492 U.S. at 241. A RICO plaintiff "can prevail by either (1) demonstrating a closed-ended conspiracy existed for such an extended period of time that a threat of future harm is implicit, or (2) an open-ended conspiracy that, while short-lived, shows clear signs of threatening to continue into the future." Midwest Grinding, 976 P.24 at 1023. Wausau contends that it satisfies both the open-ended and closed-ended continuity tests, so the court will analyze each.
1. Open-ended Continuity
An open-ended period of racketeering is a "course of criminal activity which lacks the duration and repetition to establish continuity." Midwest Grinding, 976 P.2d at 1023. A RICO plaintiff satisfies the continuity requirement by showing past conduct which "by its nature projects into the future with the threat of repetition." H.J. Inc., 492 U.S. at 242. A plaintiff shows a threat of continuity exists by pleading (1) a "specific threat of repetition"; (2) that the "predicate acts or offenses are part of an ongoing entity's regular way of doing business"; or (3) that the defendant operates a "long term association that exists for criminal purposes." Midwest Grinding, 976 F.2d at 1023 (quoting H.J. Inc., 492 13.5. at 242-43); see also Vicom. Inc. v. Harbridge Merchant Services. Inc., 20 F.3d 771, 782 (7th Cir. 1994).
Here, it is factually impossible to prove a specific threat of repetition in the future. When Wausau ceased to be the supplier of Prate Inc.'s workers compensation insurance, Defendants' alleged racketeering activities ceased and could not possibly continue. Therefore, it would be impossible for a threat of specific repetition to exist. See McDonald v. Scheneker, 18 F.3d 491, 497-98 (7th Cir. 1994) (once defendant was fired, the "threat of repetition" disappeared); Midwest Grinding, 976 F.2d at 1025 (when defendant resigned, any threat of illegal activity "ceased to exist"); LaSalle Bank Northbrook v. Baker, No. 94 C 3827, 1994 WL 630705, at *3 (N.D. Ill. Nov. 9, 1994) (when defendant went out of business, defendant's "alleged racketeering activities ceased and could not possibly continue").
Wausau also alleges that there is open-ended continuity because the predicate acts are "part of an on-going manner of conducting an otherwise legitimate business." Plaintiff's First Amended Complaint at ¶ 41. Plaintiff Wausau must demonstrate that defendants regularly filed fraudulent workers compensation claims as part of defendants' regular way of doing business. Midwest Grinding, 976 F.2d at 1023. Wausau fails to present any facts to support such an assertion, and therefore this claim fails.
Plaintiff did not allege that defendants operate a "long term association that exists for criminal purposes." Midwest Grinding, 976 F.2d at 1023 (quoting H.J. Inc., 492 U.S. at 242-43). Therefore, it is clear that Wausan has not satisfied any of the three tests for open-ended continuity. The court will next determine whether Wausau has properly alleged closed-ended continuity.
2. Closed-ended Continuity
Wausau also asserts that it can prove a pattern over a closed period of time. To do this, a plaintiff must "prov[e] a series of related predicates extending over a substantial period of time." H.J. Inc., 492 U.S. at 242. in deciding whether a plaintiff satisfies the continuity prong of the pattern requirement, post-H.J., Inc. decisions apply the factors set out by the Seventh Circuit in Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986). Fortney v. Kuipers, No. 98 C 5387, 1999 WL 102772, at *7 (N.D. Ill. Feb. 22, 1999). These factors include "the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries." Morgan, 804 F.2d at 975. Plaintiff concedes that it cannot satisfy all of the Morgan factors, but asserts that "the balance of the Morgan analysis weighs in favor of the existence of closed-ended continuity." (P1. Reply at 7). The court will examine the Morgan factors in the context of Plaintiff's allegations.
The court first examines Wausan's allegation that the length of time over which the predicate acts were committed was of a sufficient duration, Duration "is perhaps the closest thing we have to a brightline continuity test." Midwest Grinding Co., 976 F.2d at 1024. In fact, duration is "the single most important aspect of the closed-ended continuity analysis." Vicom. Inc., 20 F.3d at 781. In several post-H.J. Inc. decisions, the Seventh Circuit has underscored the importance of the duration element. For example, in Midwest Grinding, the court found it significant that the duration of the predicate acts behind the closed-end period of racketeering was only nine months. Midwest Grinding Co., 976 F.2d at 1024; Vicom. Inc., 20 F.3d at 780. Likewise, in Uni*Quality, Inc. v. Infotronix, Inc., 974 F.2d 918, 922 (7th Cir. 1992), the court found that "one scheme that lasted at most seven to eight months" was "precisely the type of short-term, closed-ended fraud that, subsequent toH.J. Inc., this circuit consistently has held does not constitute a pattern."
Wausau alleges that the predicate acts, a series of individual fraudulent mailings, occurred over a time period of at least 26 months. In LaSalle Bank Northbrook v. Baker, the court found that a time period of "twenty-six months would [not] fail as insubstantial" and that therefore the "duration hurdle thus appears to have been easily cleared." 1994 WL 630705, at *4. This court agrees that twenty-six month duration period is sufficient to be considered substantial.
The next Morgan factor is the number and variety of predicate acts. Plaintiff has not alleged a specific number of predicate acts, but does allege that the predicate acts were distinct. This argument fails, however, because all of the alleged acts are the same or similar. See Midwest Grinding, 976 F.2d at 1024-25 (finding that a number of mailings that are "very similar to one another" do not show "a long-term criminal operation.). Wausau alleges only one type of fraudulent act: using the mail system to send fraudulent workers compensation claims. Though the act may have been repeated as many as eight times, there was no variety in the predicate acts, and therefore the predicate acts are not sufficient to establish continuity.
The third and fourth Morgan factors are the number of victims and the presence of separate schemes. Wausau admits that it has only alleged one scheme involving one victim, and that it therefore cannot satisfy those factors. (P1. Reply at 6). The court, therefore, need not address those factors.
The fifth and final Morgan factor is the occurrence of distinct injuries. The proper inquiry is "whether each of these injuries was `distinct' in the sense that it signaled, or by itself constituted, a threat of `continuing' criminal activity." U.S. Textiles. Inc. v. Anheuser-Busch Co., 911 F.2d 1261, 1269 (7th Cir. 1990). Plaintiff Wausan alleges that the injuries were distinct, because "each separate mailing sought payment of workers compensation benefits for distinct individuals who were not otherwise covered under the various policies in place at the time of their injuries." (P1. Reply at 6-7). Plaintiff alleges that as a result, rather than having a single injury, Wausau suffered distinct injuries during the twenty-six month time period. Just such an argument has been explicitly rejected by the Seventh Circuit; "[A] natural and common sense approach to the pattern element of RICO would instruct that identical economic injuries suffered over the course of two years stemming from a single contract were not the type of injuries which Congress intended to compensate via the civil provisions of RICO."Vicom, 20 F.3d at 782; see also Midwest Grinding, 976 F.2d at 1025 (loss of business is one type of injury, not distinct injuries); LaSalle Bank, 1994 WL 630705, at *3 (economic injury stemming from one contract and from identical predicate acts repeated twenty-six times was not distinct). Wausac's injuries occurred repeatedly, but were not distinct in type. As a result, Wausau cannot sufficiently plead this last Morgan factor.
Altogether, Wausau has only successfully pleaded the duration factor. As in Midwest Grinding, "[t]here was only one victim . . . one scheme. . . and one type of injury. . . . This closed-ended scheme has none of the trappings of a long-term criminal threat to society. . . ." 976 F.2d at 1025. In the end, Wausau is like its many civil RICO plaintiff predecessors who "persist in trying to fit a square peg in a round hole by squeezing garden-variety business disputes into civil RICO actions . . . RICO has not federalized every state common-law cause of action available to remedy business deals gone sour." Midwest Grinding, 976 F.2d at 1025. Wausau may have a case against Michael Prate and Prate Installations, Inc. for fraud or breach of contract, but it has no case against defendants for a civil RICO violation. See id.
B. Conspiracy to Violate RICO
In Count V, Wausau alleges a § 1962(d) RICO conspiracy violation. "Section 1962(d)'s target is the agreement to violate § 1962(a), (b), or (c) through a pattern of racketeering activity, not the predicate acts or the substantive RICO violations themselves. . . . Conclusory allegations of a conspiracy are not sufficient to state a claim under § 1962(d); rather, the plaintiff must allege facts from which each defendant's agreement to violate RICO can be inferred." Chapman v. Ontra. Inc., No. 96 C 0019, 1997 WL 321681, at *8 (N.D. Ill. June 6, 1997). "In order to agree to conspire to violate RICO, a conspirator must agree to conduct or participate in the affairs of an enterprise through a pattern of racketeering activity; and second, he must agree to the commission of at least two predicate acts." Bajorat v. Columbia-Breckenridge Development Corp., 944 F. Supp. 1371, 1382 (N.D. Ill. 1996) (citing Gagan v. American Cablevision. Inc., 77 F.3d 951, 961 (7th Cir. 1996)). "To allege a conspiracy to violate RICO under § 1962(d), therefore, plaintiffs must allege at least three things: (1) that each defendant agreed to the conduct the affairs of an enterprise; (2) that each defendant agreed to the commission of at least two predicate acts; and (3) that each defendant knew that those predicate acts were part of a pattern of racketeering." Schiffels v. Kemper Fin. Servs., Inc., 978 F.2d 344, 352 (7th Cir. 1992).
Like in Bajorat, "[t]here are not allegations from which the court can infer that each defendant agreed to conduct the affairs of an enterprise through a pattern of racketeering activity or that each defendant agreed to the commission of at least two predicate acts." Bajorat, 944 F. Supp. at 1383. This is especially true since Plaintiff merely alleges that Michael Prate conspired with "others yet unknown" to violate RICO. Additionally, as the court has found that Plaintiff has failed to allege the existence of a pattern of racketeering activity, the court cannot presume from the existence of a group of people (presently "unknown") allegedly committing misdeeds that that group of people agreed to engage in a pattern of racketeering activity. This claim is premised on the existence of a pattern of racketeering; as the pattern has not been proved, this court need not further address that issue. Midwest Coffee, 976 F.2d at 1026. Accordingly, dismissal of Count V is appropriate.
C. Conspiracy to Commit Fraud
In Count IV, Wausan alleges an action for conspiracy to defraud against all defendants. Plaintiff alleges that "Michael Prate, Prate Installations and others yet unknown to Wausau acted in concert and conspired to defraud Wausau out of the proper premium amounts that it was due in return for the workers compensation insurance provided to Prate Installations" and that "[i]n furtherance of their conspiracy, Michael Prate, Prate Installations and others yet unknown to Wausau, set up numerous other companies, intentionally understated their payroll and employee numbers, and submitted false statements concerning the employment status of injured individuals among other acts." Plaintiff's First Amended Complaint at ¶ 31-32. Plaintiff further alleges that Defendants acted with the intent to deceive and defraud plaintiff and that Plaintiff has suffered damages. Plaintiff's First Amended Complaint at ¶ 33.
Defendants argue that Wausau's claim for conspiracy to defraud should be dismissed for failure to meet Fed.R.Civ.P. Rule 9(b)'s particularity of pleading requirements. This court, however, finds another basis for disposal of plaintiff's claim. As noted by the Seventh Circuit in Cenco, Inc. v. Seidman Seidman, 686 F.2d 449, 453 (7th Cir. 1982), "there is no basis in common law thinking for a tort of conspiracy to commit a tort. If there is a conspiracy and it fails, there is no injury and hence no tort liability; if it succeeds, the damages are fully recoverable in an action on the underlying tort." See also White v. Kenneth Warren Son, Ltd., 2000 WL 91920 (N.D. Ill. Jan. 14, 2000) (dismissing a claim of conspiracy to commit fraud because "the conspiracy claim is duplicative of the . . . claim for fraud . . . [and] the conspiracy claim does not bring additional defendants to the case and does not add allegations that are not already set forth"); Resolution Trust Corp. v. S K Chevrolet, 868 F. Supp. 1047, 1057 (C.D. Ill. 1994) (noting that "a claim of common law fraud subsumes the claim of conspiracy to commit fraud").
In this case, as in White, the conspiracy claim is duplicative of the Count II claim for fraud. Here, too, the conspiracy claim does not bring additional defendants into the case, except for "others yet unknown." Fraudulent conspiracy claims are subject to a heightened pleading standard under Fed.R.Civ.P. 9(b). Wolf v. City of Chicano Heights, 828 F. Supp. 520, 524 (ND. Ill. 1993). Under Rule 9(b), all averments of fraud must be "stated with particularity." Id. Plaintiff's naming of "others yet unknown" as co-conspirators is insufficient to add a new defendant. Therefore, the defendants named in the fraudulent conspiracy claim are the same as those named in the fraud claim. Also, the allegations in the fraudulent conspiracy claim are already set forth in Count II. Therefore, Defendants' motion to dismiss Count IV, the conspiracy to defraud claim, is granted.
Conclusion
For the foregoing reasons, Defendants' motion to dismiss Counts III, IV, and V is GRANTED.