Opinion
No. 92 C 6533.
July 30, 1996
MEMORANDUM OPINION
Defendant Jeffrey H. Hillebrand ("Hillebrand") is Senior Vice-President of defendant Evanston Hospital Corporation ("EHC"). Defendant Mark R. Neaman ("Neaman") is President, Chief Operating Officer and Assistant Secretary of EHC. Both individual defendants have moved to dismiss plaintiffs' nine count Second Amended Complaint ("complaint") against them, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. During the course of briefing on this motion to dismiss, plaintiffs voluntarily dismissed, with prejudice, Counts I, II, V, and VII against Hillebrand and Neaman. As for the remaining five counts, for the reasons explained, the motion to dismiss is denied with respect to Counts III, IV, VI and IX, and granted with respect to Count VIII. Plaintiffs are granted leave to amend the complaint to add specific references to Hillebrand and Neaman to Count IX, and to add new Counts X and XI.
Also, plaintiffs have moved for leave to amend the complaint to replead their allegations of mail fraud in furtherance of a scheme involving Medicare fraud. Only defendant EHC has responded to this motion. For the reasons explained in this opinion, the motion is granted with respect to the allegations that patients were the victims of the fraudulent scheme, and denied with respect to the allegations that EHC's competitors and the federal government were victims.
BACKGROUND
This case involves allegations that defendants wrongfully interfered with plaintiffs' efforts to develop their property at 1000 Central Street, Evanston, Illinois, into a Medical Office Facility ("MOF") and that defendants' conduct ultimately forced plaintiffs to sell the property and the MOF project to EHC at a substantial loss. The relevant facts have been outlined in this court's opinions of April 28, 1993, and December 1, 1995.
DISCUSSION
I. Hillebrand's and Neaman's Motion to Dismiss
In deciding a motion to dismiss, the court must assume the truth of all facts alleged in the complaint, construing the allegations liberally and viewing them in the light most favorable to the plaintiff. Wilson v. Formigoni, 42 F.3d 1060, 1062 (7th Cir. 1994); McMath v. City of Gary, 976 F.2d 1026, 1031 (7th Cir. 1992). Dismissal is properly granted "`if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Cushing v. City of Chicago, 3 F.3d 1156, 1159 (7th Cir. 1993) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)).
A. Count III (Tortious Interference with Prospective Business Advantage)
Hillebrand and Neaman contend that the tortious interference count must be dismissed because it is time-barred and fails to allege the elements of a tortious interference claim. The statute of limitations argument is unpersuasive. Defendants focus upon the allegations that the conduct of defendants in August 1990 caused plaintiffs to lose the financing commitment they had obtained from Household Finance Corporation ("HFC"). Hillebrand and Neaman argue that these allegations show that the tortious interference cause of action accrued in August 1990 and that since the relevant limitations period is five years, plaintiffs were time-barred in October 1995 from adding Hillebrand and Neaman as defendants. But plaintiffs' tortious interference claim is not based solely upon the lost HFC commitment. Plaintiffs allege that Hillebrand and Neaman wrongfully interfered "for the purpose and with the result of preventing Plaintiffs from obtaining lease commitments, leases with physicians and others, financing for the Central Avenue Project and successfully developing the Central Avenue Project." Compl. at 18. Plaintiffs further allege that they were engaged in leasing activities and efforts to obtain financing for the project from 1985 through December 19, 1991, the date on which plaintiffs transferred ownership of the project to Evanston Hospital Corporation, compl. at 5-6, and that defendants' wrongful conduct continued until at least December 31, 1991. Compl. at 13. These allegations support the inference that plaintiffs had discovered their injury, and that therefore the cause of action had accrued, Palmer v. Board of Educ., 46 F.3d 682, 685 (7th Cir. 1995); Goodhand v. United States, 40 F.3d 209, 212 (7th Cir. 1994), by December 19, 1991 — fewer than four years before Hillebrand and Neaman were added to the case. As plaintiffs point out, the exact date on which they discovered the injury is a fact question beyond the scope of a motion to dismiss.
Defendants' argument that plaintiffs have failed to plead the elements of a tortious interference claim is equally unpersuasive. As the cases they cite show, corporate officers, like Hillebrand and Neaman, have a "conditional privilege to interfere with the corporation's contracts . . . so that they may act in accordance with their business judgment and discretion to further the interests of the corporation. The same reasons require giving a conditional privilege to these individuals when they interfere with the contracts of third parties which affect the corporation." Langer v. Becker, 531 N.E.2d 830, 835 (Ill.App.Ct. 1988). To state a cause of action for tortious interference against a conditionally privileged individual, a plaintiff must "set forth allegations from which actual malice may reasonably be said to exist." Id. at 833-34. For actual malice to exist "simply means that the interference must have been intentional and without justification." HPI Health Care Servs. v. Mt. Vernon Hospital, Inc., 545 N.E.2d 672 (Ill. 1989). To have acted with malice, the individual must have "`acted with a desire to harm which was unrelated to the interest he was presumably seeking to protect.'" Capital Options Invs., Inc. v. Goldberg Bros. Commodities Inc., 958 F.2d 186, 189 (7th Cir. 1992) (quotingLanger, 531 N.E.2d at 834).
The complaint indicates that Hillebrand and Neaman were presumably seeking to protect EHC's interest in leasing the exact amount of space it needed when they agreed to lease 20,000 square feet and then reneged and took only 10,000. Actual malice can be inferred here from the allegations that EHC actually did need, and ultimately took, more than 20,000 square feet in the finished building in order to house doctors who had been occupying space in EHC's hospital building in violation of the Evanston zoning laws. Defendants' actions were, therefore, allegedly unrelated to EHC's actual leasing needs, and it can be inferred that they were acting purely out of a desire to harm plaintiffs. With respect to other allegations supporting the tortious interference count, actual malice can be inferred because defendants had no apparent justification at all for their actions. This is particularly true of the alleged threat to consider Drs. Gharemani and Friederici to be competitors of EHC if they were to lease space in plaintiffs' building. These doctors wanted to move their x-ray laboratory out of the hospital and into the MOF across the street. Since EHC had allegedly been under pressure from the City of Evanston to move the for-profit private medical practices of various doctors out of the tax-exempt hospital building, we cannot see what justification EHC could possibly have had for trying to keep the x-ray laboratory in the hospital building. Again, it can be inferred that defendants were acting purely out of a desire to harm plaintiffs.
B. Count IV (Fraud)
Hillebrand and Neaman contend that plaintiffs' fraud count against them must be dismissed because plaintiffs have failed to allege that these defendants made false statements with the intent to induce plaintiffs to act, and that plaintiffs did act in reasonable reliance on those statements. However that may be, the complaint does adequately allege all of the elements of fraud against EHC. As plaintiffs point out, inducement and reliance are specifically alleged. Compl. at 11, 13. Furthermore, as we held in our opinion of December 1, 1995, the complaint alleges EHC's fraud with the particularity required by Fed.R.Civ.P. 9(b). As they acknowledge in their present argument, Hillebrand and Neaman are clearly alleged to be two of the participants in EHC's fraud. It has been the law in Illinois for over sixty years that a corporate officer is liable for any tortious conduct of the corporation in which he participated, even if the officer was acting for the corporation at the time. Itofca, Inc. v. Hellhake, 8 F.3d 1202, 1204 nn. 6,8 (7th Cir. 1993). Therefore, plaintiffs' fraud count will not be dismissed with respect to defendants Hillebrand and Neaman.
C. Count VI (Conspiracy)
Hillebrand and Neaman rely on Mehl v. Navistar Int'l Corp., 670 F.Supp. 239 (N.D. Ill 1987), for the proposition that
since a corporation can only act through the conduct of its agents, corporate directors can never be personally liable for damages stemming from an unlawful conspiracy between the corporation and independent third parties where the corporate directors were acting solely on behalf of the corporation and maintained no independent personal stake in the object of the conspiracy.Id. at 241. However, Mehl does not persuade us that plaintiffs' conspiracy count should be dismissed with respect to Hillebrand and Neaman. The authorities the Mehl court relied upon, like the other cases cited by defendants, involved allegations that a corporation conspired only with its own officers, directors and other agents. Id. These conspiracy claims were legal impossibilities because a corporation cannot conspire with itself. Id. The Mehl court's extension of this legal impossibility to preclude individual liability for conspiracies in which the corporation conspires with independent third parties is not consistent with the well-established rule that corporate officers are liable for any torts of the corporation in which they have participated. As with the fraud count, the complaint clearly alleges that Hillebrand and Neaman participated in EHC's conspiracy to fraudulently obtain plaintiffs' MOF. Hillebrand and Neaman allegedly caused EHC to enter into the conspiracy. We stress that Hillebrand and Neaman are not liable as co-conspirators with EHC — that is the legal impossibility recognized by the cases. Rather, Hillebrand and Neaman are liable as participants in EHC's tortious conduct of entering into a conspiracy with third parties to defraud plaintiffs.
There is, then, no merit to any of defendants' arguments relative to the sufficiency of the conspiracy allegations — (1) legal impossibility of individual liability, (2) failure to allege the individual's role in the conspiracy, and (3) failure to allege that any underlying tort has been committed. Also, for the reasons explained relative to the tortious interference count, neither is there any merit to Hillebrand's and Neaman's contention that the conspiracy claim is barred by Illinois' five year statute of limitations. Count VI will therefore not be dismissed.
D. Counts VIII and IX (RICO and RICO Conspiracy)
Since there is general agreement that Hillebrand and Neaman are not alleged to have personally acquired or maintained an interest in or control of an enterprise through a pattern of racketeering activity, as required to state a RICO claim under 18 U.S.C. § 1962(b), Count VIII is dismissed with respect to them. Defendants contend that Count IX should be dismissed for the same reason since it alleges a conspiracy to violate Section 1962(b). However, those who have not acquired an interest in or control over an enterprise are still capable of conspiring with a corporation that did. Also, unlike claims of civil conspiracy, it is not a legal impossibility for a corporation to be able to enter into a RICO conspiracy with its own officers for the purpose of acquiring an interest in or control over another enterprise. Ashland oil, Inc. v. Arnett, 875 F.2d 1271, 1281 (7th Cir. 1989). Therefore, Count IX will not be dismissed against Hillebrand and Neaman.
It is true that Count IX does not refer to Hillebrand and Neaman by name. Plaintiffs have proposed to cure this, and other technical deficiencies in their RICO allegations against Hillebrand Neaman, by amending the complaint. Because the court is not persuaded by defendants' RICO statute of limitations argument, or that defendants would be prejudiced, plaintiffs are granted leave to amend Count IX to specifically allege that Hillebrand and Neaman conspired with EHC and others to violate Section 1962(b), and to amend the complaint to add Counts X and XI which state RICO claims against Hillebrand and Neaman for conducting, and conspiring with others to conduct, the affairs of EHC in violation of 18 U.S.C. § 1962(c).
Hillebrand and Neaman make the same argument with respect to the four year RICO statute of limitations as they made with respect to the tortious interference and civil conspiracy statutes of limitation. They correctly point out that in the Seventh Circuit a RICO cause of action, like a tort cause of action, accrues when the plaintiff discovers or should have discovered his injury, not when the plaintiff discovers the pattern of racketeering activity that caused it. McCool v. Strata Oil Co., 972 F.2d 1452, 1465 (7th Cir. 1992). Defendants contend that based on the allegations of the complaint, plaintiffs discovered or should have discovered their injury in August 1990 when EHC's decision to take 10,000 square feet of space instead of 20,000 allegedly caused plaintiffs to lose HFC's financing commitment. Since Hillebrand and Neaman were not added to the case until October 1995, they contend that the RICO claims were brought against them more than one year too late. However, the injury plaintiffs allege in their RICO counts is EHC's acquisition of the MOF project at a substantial loss to plaintiffs, not the loss of a particular financing commitment. Therefore, the RICO injury did not occur until the date on which plaintiffs transferred ownership of the project to EHC. As has been previously discussed, the complaint alleges that date to be December 19, 1991.
Defendants contend that at the very latest, the accrual date for the RICO claims was sometime in September 1991 when, according to the allegations of the complaint, EHC entered into a letter of intent to acquire the MOF. However, it would not be reasonable, and we would not be viewing these allegations in the light most favorable to plaintiffs, if we were to infer that this letter of intent was a binding contract for the purchase of the MOF project, and that EHC therefore acquired the MOF project and injured plaintiffs in September 1991. In the final analysis, the exact date on which EHC acquired plaintiffs' property and the date on which plaintiffs should have discovered their injury are issues of fact outside the scope of this motion to dismiss. Based on the allegations of the complaint and the reasonable inferences to be drawn from them, since the RICO claims were brought against Hillebrand and Neaman in October 1995, fewer than four years after December 19, 1991, the statute of limitations is not a basis upon which to dismiss the RICO counts, or to deny plaintiffs leave to make their proposed RICO amendments.
The claims asserted in the new RICO counts will relate back to the original October 1995 pleading because they arise out of the conduct plaintiffs attempted to set forth in that pleading. Fed.R.Civ.P. 15(c)(2). Although the original Counts VIII and IX were defective as they related to the individual defendants, those counts were sufficient to put defendants on notice that plaintiffs were attempting to bring RICO claims against them. Therefore, Hillebrand and Neaman have not been prejudiced, and justice requires that plaintiffs be allowed to amend their complaint.
II. Plaintiffs' Motion to Replead Medicare Fraud as a RICO Predicate
In our opinion of December 1, 1995, we held that plaintiffs had failed to satisfy the particularity requirements of Fed.R.Civ.P. 9(b) in their allegations of mail fraud in furtherance of a fraudulent scheme to induce physicians to refer their Medicare patients to EHC. Plaintiffs had failed to identify any cognizable victims of the mail fraud. Plaintiffs now seek to correct that deficiency by alleging that the patients of the doctors participating in the referral scheme, hospitals that compete with EHC for referrals, and the federal government are all victims of the scheme. Plaintiffs have succeeded in correcting their failure to adequately identify the victims of the scheme, but only with respect to the allegations that the patients are the victims.
We are persuaded by the Seventh Circuit's interpretation ofLancaster Com. Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397 (9th Cir. 1991), a RICO case involving allegations of mail fraud in connection with an alleged Medicare referral scheme that is identical to the fraudulent scheme alleged in the present case. The Seventh Circuit concluded that only the patients, and not a hospital competing for the opportunity to serve the patients, could be the victims of the mail fraud. Israel Travel Advis. Serv. v. Israel Ident. Tours, 61 F.3d 1250, 1258 (7th Cir. 1995). The competing hospital was not a victim of the mail fraud because its injury, the loss of a business opportunity, was derivatively caused by the mail fraud perpetrated against its customers. Id. The competing hospital was neither in the position of the classic mail fraud victim who would be deprived of property by deception, and is therefore protected by 18 U.S.C. § 1341, nor in the position of the patients who would be deprived of the intangible right of honest services by the fraudulent scheme, and are therefore protected by 18 U.S.C. § 1346. Id. See also, United States v. Jain, Nos. 94-00087-01, 94-00087-02-CR-W-6, 1995 WL 9301, at *3 (W.D. Mo. Jan. 9, 1995) (holding that remuneration in return for patient referrals is conceptually similar to bribery and deprives patients of intangible right of honest services); United States v. Neufeld, 908 F. Supp. 491, 500 (S.D. Ohio 1995) (holding that allegation that doctor solicited bribes or remuneration in return for patient referrals is allegation of breach of doctor's fiduciary duty to patients and, therefore, of a fraudulent deprivation of patients' intangible right to honest services).
In our previous opinion we held that the government could not be a victim of this mail fraud because it would not be deprived of property by the scheme. The government would pay the same money to whichever hospital provided services to the Medicare patient. Plaintiffs now claim that the government and the American taxpayers have suffered a different injury. The new argument is that EHC has deprived the government of millions of dollars in income tax revenues by maintaining its tax-exempt status in spite of the fact that it is not entitled to that status because it has engaged in Medicare fraud. This argument makes no sense. EHC would gain nothing from the government by engaging in Medicare fraud. EHC's tax-exempt status is what deprives the government of tax revenues, not its Medicare fraud. In fact, rather than being deprived of property, the government and the American taxpayers could actually realize net revenue as a result of EHC's Medicare fraud if EHC lost its tax-exempt status.
Although we did not discuss it in our previous opinion, we note that the federal government was also not deprived of the intangible right to honest services. "[A]n intangible rights scheme is only cognizable when at least one of the schemers has a fiduciary relationship with the defrauded person or entity."United States v. Alexander, 741 F.2d 962, 964 (7th Cir. 1984). Since neither the doctors involved in the referral scheme nor EHC owes the federal government a fiduciary duty with respect to Medicare claims, the federal government has no right to honest services from them.
The arguments made by EHC in opposition to plaintiffs' motion to replead the Medicare fraud allegations are also meritless. EHC argues that the alleged predicate acts of mail fraud in furtherance of the Medicare fraud scheme are not related to EHC's scheme to acquire plaintiffs' MOF project. Without acknowledging it, EHC is attempting to reopen the question of whether or not plaintiffs have adequately alleged a pattern of racketeering activity. That question was answered in the affirmative in our opinion of December 1, 1995. By alleging these additional mail fraud predicates in furtherance of yet another illegal scheme, plaintiffs have simply expanded the scope of the pattern they have already alleged.
Also, contrary to EHC's contention, plaintiffs have clearly alleged that EHC offered to provide doctors with remuneration in return for Medicare referrals. As plaintiffs point out, their proposed amendment states: "During the 1980's and into the 1990's, EHC, acting through Hillebrand and Neaman, knowingly and willfully offered and/or paid physicians remuneration to refer business to the Evanston Hospital Corporation, including for services covered by the Medicare program." Proposed Amendment Pleading Medicare Fraud at ¶ 3.
CONCLUSION
For the reasons stated in this opinion, the Rule 12(b)(6) motion by defendants Hillebrand and Neaman to dismiss those counts of the second amended complaint that remain pending against them is denied with respect to Counts III, IV, VI and IX, and granted with respect to Count VIII. Plaintiffs are granted leave to amend the complaint to add new Counts X and XI, and to add specific references to Hillebrand and Neaman to Count IX. Also, plaintiffs' motion for leave to amend the complaint to replead their allegations of mail fraud in furtherance of a scheme involving Medicare fraud is granted with respect to the allegations that patients were the victims of the fraudulent scheme, and denied with respect to the allegations that defendants' competitors and the federal government were victims. Plaintiffs are given until August 13, 1996, to file these amendments.