Source: http://openjurist.org/507/us/170
Timestamp: 2015-08-03 17:19:04
Document Index: 114740994

Matched Legal Cases: ['§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1961', '§ 1962', '§ 3', '§ 78']

507 US 170 Reves v. Ernst & Young | OpenJurist
507 U.S. 170 - Reves v. Ernst & Young Home
507 US 170 Reves v. Ernst & Young 507 U.S. 170
113 S.Ct. 1163
122 L.Ed.2d 525
Bob REVES, et al., Petitionersv.ERNST & YOUNG.
No. 91-886.
A provision of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c), makes it unlawful "for any person employed by or associated with [an interstate] enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. . . ." After respondent's predecessor, the accounting firm of Arthur Young and Company, engaged in certain activities relating to valuation of a gasohol plant on the yearly audits and financial statements of a farming cooperative, the cooperative filed for bankruptcy, and the bankruptcy trustee brought suit, alleging, inter alia, that the activities in question rendered Arthur Young civilly liable under § 1962(c) to petitioner holders of certain of the cooperative's notes. Among other things, the District Court applied Circuit precedent requiring, in order for such liability to attach, "some participation in the operation or management of the enterprise itself"; ruled that Arthur Young's activities failed to satisfy this test; and granted summary judgment in its favor on the RICO claim. Agreeing with the lower court's analysis, the Court of Appeals affirmed in this regard.
Held: One must participate in the operation or management of the enterprise itself in order to be subject to § 1962(c) liability. Pp. 6-16.
(a) Examination of the statutory language in the light of pertinent dictionary definitions and the context of § 1962(c) brings the section's meaning unambiguously into focus. Once it is understood that the word "conduct" requires some degree of direction, and that the word "participate" requires some part in that direction, it is clear that one must have some part in directing an enterprise's affairs in order to "participate, directly or indirectly, in the conduct of such . . . affairs." The "operation or management" test expresses this requirement in a formulation that is easy to apply. Pp. ____.
(b) The "operation or management" test finds further support in § 1962's legislative history. Pp. ____.
(c) RICO's "liberal construction" clause—which specifies that the "provisions of this title shall be liberally construed to effectuate its remedial purposes"—does not require rejection of the "operation or management" test. The clause obviously seeks to ensure that Congress' intent is not frustrated by an overly narrow reading of the statute, but it is not an invitation to apply RICO to new purposes that Congress never intended. It is clear from the statute's language and legislative history that Congress did not intend to extend § 1962(c) liability beyond those who participate in the operation or management of an enterprise through a pattern of racketeering activity. Pp. ____.
(d) The "operation or management" test is consistent with the proposition that liability under § 1962(c) is not limited to upper management. "Outsiders" having no official position with the enterprise may be liable under § 1962(c) if they are "associated with" the enterprise and participate in the operation or management of the enterprise. Pp. ____.
(e) This Court will not overturn the lower courts' findings that respondent was entitled to summary judgment upon application of the "operation or management" test to the facts of this case. The failure to tell the cooperative's board that the gasohol plant should have been valued in a particular way is an insufficient basis for concluding that Arthur Young participated in the operation or management of the cooperative itself. Pp. ____.
BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and STEVENS, O'CONNOR, and KENNEDY, JJ., joined, and in all but Part IV-A of which SCALIA and THOMAS, JJ., joined. SOUTER, J., filed a dissenting opinion, in which WHITE, J., joined.
Gary M. Elden, Chicago, IL, for petitioners.
Michael R. Dreeben, Washington, DC, for the U.S. as amicus curiae in support of the petitioners.
Kathryn A. Oberly, Washington, DC, for respondent.
Justice BLACKMUN delivered the opinion of the Court.1
This case requires us once again to interpret the provisions of the Racketeer Influenced and Corrupt Organizations (RICO) chapter of the Organized Crime Control Act of 1970, Pub.L. 91-452, Title IX, 84 Stat. 941, as amended, 18 U.S.C. §§ 1961-1968 (1988 ed. and Supp.II). Section 1962(c) makes it unlawful "for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. . . ." The question presented is whether one must participate in the operation or management of the enterprise itself to be subject to liability under this provision.
* The Farmer's Cooperative of Arkansas and Oklahoma, Inc. (the Co-op), began operating in western Arkansas and eastern Oklahoma in 1946. To raise money for operating expenses, the Co-op sold promissory notes payable to the holder on demand. Each year, Co-op members were elected to serve on its board. The board met monthly but delegated actual management of the Co-op to a general manager. In 1952, the board appointed Jack White as general manager.
In January 1980, White began taking loans from the Co-op to finance the construction of a gasohol plant by his company, White Flame Fuels, Inc. By the end of 1980, White's debts to the Co-op totalled approximately $4 million. In September of that year, White and Gene Kuykendall, who served as the accountant for both the Co-op and White Flame, were indicted for federal tax fraud. At a board meeting on November 12, 1980, White proposed that the Co-op purchase White Flame. The board agreed. One month later, however, the Co-op filed a declaratory action against White and White Flame in Arkansas state court alleging that White actually had sold White Flame to the Co-op in February 1980. The complaint was drafted by White's attorneys and led to a consent decree relieving White of his debts and providing that the Co-op had owned White Flame since February 15, 1980.
White and Kuykendall were convicted of tax fraud in January 1981. See United States v. White, 671 F.2d 1126 (CA8 1982) (affirming their convictions). Harry Erwin, the managing partner of Russell Brown and Company, an Arkansas accounting firm, testified for White, and shortly thereafter the Co-op retained Russell Brown to perform its 1981 financial audit. Joe Drozal, a partner in the Brown firm, was put in charge of the audit and Joe Cabaniss was selected to assist him. On January 2, 1982, Russell Brown and Company merged with Arthur Young and Company, which later became respondent Ernst & Young.2
One of Drozal's first tasks in the audit was to determine White Flame's fixed-asset value. After consulting with White and reviewing White Flame's books (which Kuykendall had prepared), Drozal concluded that the plant's value at the end of 1980 was $4,393,242.66, the figure Kuykendall had employed. Using this figure as a base, Drozal factored in the 1981 construction costs and capitalized expenses and concluded that White Flame's 1981 fixed-asset value was approximately $4.5 million. Drozal then had to determine how that value should be treated for accounting purposes. If the Co-op had owned White Flame from the beginning of construction in 1979, White Flame's value for accounting purposes would be its fixed-asset value of $4.5 million. If, however, the Co-op had purchased White Flame from White, White Flame would have to be given its fair market value at the time of purchase, which was somewhere between $444,000 and $1.5 million. If White Flame were valued at less than $1.5 million, the Co-op was insolvent. Drozal concluded that the Co-op had owned White Flame from the start and that the plant should be valued at $4.5 million on its books.
On April 22, 1982, Arthur Young presented its 1981 audit report to the Co-op's board. In that audit's Note 9, Arthur Young expressed doubt whether the investment in White Flame could ever be recovered. Note 9 also observed that White Flame was sustaining operating losses averaging $100,000 per month. See Arthur Young & Co. v. Reves, 937 F.2d 1310, 1318 (CA8 1991). Arthur Young did not tell the board of its conclusion that the Co-op always had owned White Flame or that without that conclusion the Co-op was insolvent.
On May 27, the Co-op held its 1982 annual meeting. At that meeting, the Co-op, through Harry C. Erwin, a partner in Arthur Young, distributed to the members condensed financial statements. These included White Flame's $4.5 million asset value among its total assets but omitted the information contained in the audit's Note 9. See 937 F.2d, at 1318-1319. Cabaniss was also present. Erwin saw the condensed financial statement for the first time when he arrived at the meeting. In a 5-minute presentation, he told his audience that the statements were condensed and that copies of the full audit were available at the Co-op's office. In response to questions, Erwin explained that the Co-op owned White Flame and that the plant had incurred approximately $1.2 million in losses but he revealed no other information relevant to the Co-op's true financial health.
The Co-op hired Arthur Young also to perform its 1982 audit. The 1982 report, presented to the board on March 7, 1983, was similar to the 1981 report and restated (this time in its Note 8) Arthur Young's doubt whether the investment in White Flame was recoverable. See 937 F.2d, at 1320. The gasohol plant again was valued at approximately $4.5 million and was responsible for the Co-op's showing a positive net worth. The condensed financial statement distributed at the annual meeting on March 24, 1983, omitted the information in Note 8. This time, Arthur Young reviewed the condensed statement in advance but did not act to remove its name from the statement. Cabaniss, in a 3-minute presentation at the meeting, gave the financial report. He informed the members that the full audit was available at the Co-op's office but did not tell them about Note 8 or that the Co-op was in financial difficulty if White Flame were written down to its fair market value. Ibid.
In February 1984, the Co-op experienced a slight run on its demand notes. On February 23, when it was unable to secure further financing, the Co-op filed for bankruptcy. As a result, the demand notes were frozen in the bankruptcy estate and were no longer redeemable at will by the noteholders.
On February 14, 1985, the trustee in bankruptcy filed suit against 40 individuals and entities, including Arthur Young, on behalf of the Co-op and certain noteholders. The District Court certified a class of noteholders, petitioners here, consisting of persons who had purchased demand notes between February 15, 1980, and February 23, 1984. Petitioners settled with all defendants except Arthur Young. The District Court determined before trial that the demand notes were securities under both federal and state law. See Robertson v. White, 635 F.Supp. 851, 865 (WD Ark.1986). The court then granted summary judgment in favor of Arthur Young on the RICO claim. See Robertson v. White, Nos. 85-2044, 85-2096, 85-2155, and 85-2259 (WD Ark. Oct. 15, 1986), App. 198-200. The District Court applied the test established by the Eighth Circuit in Bennett v. Berg, 710 F.2d 1361, 1364 (en banc), cert. denied, sub nom. Prudential Ins. Co. of America v. Bennett, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983), that § 1962(c) requires "some participation in the operation or management of the enterprise itself." App. 198. The court ruled: "Plaintiffs have failed to show anything more than that the accountants reviewed a series of completed transactions, and certified the Co-op's records as fairly portraying its financial status as of a date three or four months preceding the meetings of the directors and the shareholders at which they presented their reports. We do not hesitate to declare that such activities fail to satisfy the degree of management required by Bennett v. Berg." Id., at 199-200.
The case went to trial on the state and federal securities fraud claims. The jury found that Arthur Young had committed both state and federal securities fraud and awarded approximately $6.1 million in damages. The Court of Appeals reversed, concluding that the demand notes were not securities under federal or state law. See Arthur Young & Co. v. Reves, 856 F.2d 52, 55 (1988). On writ of certiorari, this Court ruled that the notes were securities within the meaning of § 3(a)(10) of the Securities Exchange Act of 1934, 48 Stat. 882, as amended, 15 U.S.C. § 78c(a)(10). Reves v. Ernst & Young, 494 U.S. 56, 70, 110 S.Ct. 945, 953, 108 L.Ed.2d 47 (1990).
On remand, the Court of Appeals affirmed the judgment of the District Court in all major respects except the damages award, which it reversed and remanded for a new trial. See 937 F.2d, at 1339-1340. The only part of the Court of Appeals' decision that is at issue here is its affirmance of summary judgment in favor of Arthur Young on the RICO claim. Like the District Court, the Court of Appeals applied the "operation or management" test articulated in Bennett v. Berg and held that Arthur Young's conduct did not "rise to the level of participation in the management or operation of the Co-op." See 937 F.2d, at 1324. The Court of Appeals for the District of Columbia Circuit also has adopted an "operation or management" test. See Yellow Bus Lines, Inc. v. Drivers, Chauffeurs & Helpers Local Union 639, 286 U.S.App.D.C. 182, 188, 913 F.2d 948, 954 (1990) (en banc), cert. denied, 501 U.S. ----, 111 S.Ct. 2839, 115 L.Ed.2d 1007 (1991). We granted certiorari, 502 U.S. ----, 112 S.Ct. 1165, 117 L.Ed.2d 411 (1992), to resolve the conflict between these cases and Bank of America National Trust & Savings Assn. v. Touche Ross & Co., 782 F.2d 966, 970 (CA11 1986) (rejecting requirement that a defendant participate in the operation or management of an enterprise).
"In determining the scope of a statute, we look first to its language. If the statutory language is unambiguous, in the absence of 'a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive.' " United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981), quoting Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). See also Russello v. United States, 464 U.S. 16, 20, 104 S.Ct. 296, 299, 78 L.Ed.2d 17 (1983). Section 1962(c) makes it unlawful "for any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. . . ."
The narrow question in this case is the meaning of the phrase "to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs." The word "conduct" is used twice, and it seems reasonable to give each use a similar construction. See S