Source: http://www2.kyeb.uscourts.gov/opin/howopin/Wallace's01-50545Thomas.opi.htm
Timestamp: 2017-07-25 10:35:55
Document Index: 545823136

Matched Legal Cases: ['§ 411', '§ 1962', '§ 1961', '§ 1961', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 467', '§ 1961']

the above-styled case on January 29, 2004. The court has sustained the
motion and established a procedure for the estimation of the claims.
The parties have asked the court to resolve two legal issues early in
the process to narrow the scope of the questions to be decided in
estimating the claims. Those issues are (1) whether comparative fault
is available as a partial defense to intentional tort claims, and
(2) whether the claimants have asserted facts sufficient to state a
claim for relief under the Racketeer Influenced and Corrupt Practices
Act ("RICO"). Having considered the parties' briefs, oral arguments,
and the affidavits, deposition transcripts, and other materials submitted in support of the parties' respective positions, the court will
resolve both issues in favor of the Liquidating Supervisor.
Prior to the commencement of this case, R. David Thomas and affiliated entities (the "Thomas Lenders") made various loans to and issued various guaranties of loans made by others to Wallace G. Wilkinson ("Mr. Wilkinson"), the principal of Wallace's Bookstores, Inc.
(the "Debtor"). Those creditors or their successors in interest (the
"Thomas Claimants") assert that they are entitled to recover damages
suffered as a result of the credit extensions from the Debtor, under
theories of fraud and (through RICO) mail fraud, wire fraud, and money
laundering. (1) The Liquidating Supervisor contends that the Debtor's liability should be reduced on account of the Thomas Lenders' own negligence in extending the credit to Mr. Wilkinson. The Thomas Claimants
deny that principles of comparative fault apply to intentional torts. (2)
At the outset, the Thomas Claimants contend that the law of Florida, not that of Kentucky, applies to the fraud claim. When the federal courts are called upon to resolve issues of state law in actions
based on "diversity" jurisdiction, they must determine which state's
laws govern by reference to the conflict of law rules of the forum
state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).
Unless and until the Sixth Circuit overrules its decision in United
Construction Co. v. Milam, 124 F.2d 670, 671 (6th Cir. 1942), the same
principle applies when the litigation is based on "bankruptcy" jurisdiction. Accord, e.g., Bennett v. Macy, 324 F. Supp. 409, 410 (W.D.
Ky. 1971). (3) Kentucky courts apply Kentucky substantive law in tort
cases if "Kentucky has enough contacts to justify applying Kentucky
law." Arnett v. Thompson, 433 S.W.2d 109, 113 (Ky. 1968). There is no
question that there are sufficient contacts that would justify the
application of Kentucky law to the Thomas Claimants' fraud claim.
Kentucky's comparative fault statute applies, by its own terms,
"[i]n all tort actions," and the statute speaks of the allocation of
"fault," not negligence. K.R.S. § 411.182(1)-(3). Indeed, the Kentucky
Court of Appeals has rejected the argument that "apportionment between
negligent and intentional tort-feasors is not required," seeing "no
reason to create a distinction between the two." Roman Catholic Diocese v. Secter, 966 S.W.2d 286, 291 (Tenn. Ct. App. 1998) (apportioning punitive, as well as compensatory, damages). In addition, the Kentucky courts have applied the comparative fault statute in other intentional tort cases without discussion. E.g., Brewer v. Hillard,
15 S.W.3d 1, 13-14 (Ky. Ct. App. 1999) (intentional infliction of
emotional distress). The Thomas Claimants cite the court to no Kentucky court decisions to the contrary. (4)
In light of the plain meaning of Section 411.182 of the Kentucky
Revised Statutes, the court holds that any tort damages suffered by
the Thomas Claimants may be allocated between and among them, the
Debtor, and third parties in accordance with the parties' relative
fault. Hence, any fault of the Thomas Lenders that contributed to
their own injury would have the effect of reducing the amounts of
their claims and, therefore, the court's estimate of the amount of the
The Thomas Claimants' RICO claims are based on § 1962(a) and (c)
of Title 18, United States Code. (Resp. of Thomas Claimants to Mot.
for Estimation of the Thomas-Related Claims, at 28.) Subsection (a)
prohibits persons from using or investing funds derived from racketeering activity or the collection of an unlawful debt (6) "in acquisition
of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." Subsection (c) makes it unlawful for persons "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 or collection of unlawful debt." Accordingly, both provisions require the existence of an "enterprise." RICO defines that term as "any individual,
The Eighth Circuit has "identified three characteristics that
distinguish a RICO enterprise: First, there must be a common or shared
purpose that animates the individuals associated with it. Second, it
must be an 'ongoing organization' whose members 'function as a continuing unit'; in other words, there must be some continuity of structure and of personnel. Third, there must be an ascertainable structure
distinct from that inherent in the conduct of a pattern of racketeering activity." U.S. v. Kragness, 830 F.2d 842, 855 (8th Cir. 1987)
(citing U.S. v. Turkette, 452 U.S. 576, 583, 101 S. Ct. 2524 (1981))
(other citations omitted); accord, e.g., U.S. v. Riccobene, 709 F.2d
214, 221-22 (3d Cir. 1983); Perez-Rubio v. Wyckoff, 718 F. Supp. 217,
241 (S.D.N.Y. 1989); Medallion TV Enters., Inc. v. SelecTV of Cal.,
Inc., 627 F. Supp. 1290, 1294 (C.D. Cal. 1986), aff'd, 833 F.2d 1360
(9th Cir. 1987). A RICO "enterprise" may consist of a group of corporations, Dana Corp. v. Blue Cross & Blue Shield Mut., 900 F.2d 882,
887 (6th Cir. 1990), or of a corporation and its controlling shareholder, e.g., Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., 46 F.3d
258, 268 (3d Cir. 1995); United States v. Robinson, 8 F.3d 398, 406-07
(7th Cir. 1993); Giuliano v. Everything Yogurt, Inc., 819 F. Supp.
240, 247 (E.D.N.Y. 1993).
The Thomas Claimants allege that the enterprise consisted of
(a) the Debtor, (b) bookstores located in various states, (c) Wallace's Book Company, Inc. ("WBC"), and (d) Mr. Wilkinson. The Thomas
Claimants assert that the "common or shared purpose that animated"
these entities was the perpetration of a Ponzi scheme. Specifically,
they claim that the Debtor mailed out false financial statements so as
to obtain loans to Mr. Wilkinson, which were used to repay other
debts. They do not, however, explain the roles of the bookstores or
WBC in the enterprise, i.e., how they shared a common purpose with the
Debtor and Mr. Wilkinson. Nevertheless, the Debtor and Mr. Wilkinson
alone could constitute an enterprise if the Thomas Claimants are able
to prove their allegations that those two entities had a common or
shared purpose, as it appears that they would then function as an ongoing organization and the relationship between the Debtor and its
sole shareholder would seem to constitute an "ascertainable structure
distinct from that inherent in the conduct of a pattern of racketeering activity." The Thomas Claimants have sufficiently alleged the existence of a RICO "enterprise."
RICO defines "racketeering activity" to include the types of
activities alleged by the Thomas Claimants, i.e., mail fraud, wire
fraud, and money laundering. 18 U.S.C. § 1961(1)(A). The requirement
of a "pattern of racketeering activity" mandates "at least two acts of
racketeering activity . . . the last of which occurred within ten
years (excluding any period of imprisonment) after the commission of a
prior act of racketeering activity." Id. § 1961(5). The prerequisite
of two predicate acts is a minimum requirement: a mere pair of acts
does not necessarily establish a "pattern" of racketeering activity.
H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237-38, 109
S. Ct. 2893 (1989). Moreover, the predicate acts must bear some relation to each other:
In normal usage, the word "pattern" here would be taken to
require more than just a multiplicity of racketeering predicates. A "pattern" is an "arrangement or order of things or
activity," and the mere fact that there are a number of
predicates is no guarantee that they fall into any arrangement or order. It is not the number of predicates but the
relationship that they bear to each other or to some external organizing principle that renders them "ordered" or
Id. 492 U.S. at 238 (citation omitted). There must be two or more acts
that 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'" as part of a
continuing pattern. Id. at 240-41.
The Thomas Claimants allege that the Debtor "sent numerous false
and fraudulent audited and unaudited financial statements by U.S. mail
to R. David Thomas and R. L. Richards, United, Union, and others" as
part of a "pattern of defrauding the Thomas Claimants and other lenders and creditors of many millions of dollars and using those millions
to continue the fraudulent business of WBI and for the personal benefit of Wilkinson." It appears that these allegations, if proven, would
constitute a pattern of continuing acts having the same or similar
purposes, results, participants, and methods of commission. While, as
the Liquidating Supervisor points out, the scheme insofar as the
Thomas Claimants are concerned turned out to be a relatively short-lived one, the Thomas Claimants allege that they were only one group
of victims of a scheme spanning several years. Moreover, the Supreme
Court has made clear that a threat of repeated activity may be enough
to satisfy the "continuity" requirement. Id. at 241; see also Am.
Eagle Credit Corp. v. Gaskins, 920 F.2d 352, 354-55 (6th Cir. 1990).
Although the Thomas Claimants have not explained how the Debtor participated in wire fraud or money laundering and their allegations of
mail fraud are rather vague, they have sufficiently alleged the existence of a "pattern of racketeering activity" for the purposes of the
claims estimation proceeding.
C. Illegal Investment; Participation in Enterprise
As mentioned above, RICO § 1962(a) prohibits persons from using
or investing funds derived from racketeering activity "in acquisition
of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." The Debtor did not directly receive any
funds as the result of the alleged racketeering activity, so it could
not use or invest such funds in an enterprise in interstate commerce.
Mr. Wilkinson was the recipient of the funds generated by the alleged
racketeering activity, and he invested some of the funds in the enterprise by remitting them to the Debtor, but it was Mr. Wilkinson - not
the Debtor - that made use of the allegedly ill-gotten gains. The
court, therefore, estimates the value of the Thomas Claimants's claim
under § 1962(a) at zero.
Subsection (c) of § 1962 makes it unlawful for persons associated
with an enterprise engaged in interstate commerce to "conduct or participate, directly or indirectly, in the conduct of such enterprise's
affairs through a pattern of racketeering activity or collection of
unlawful debt." The Supreme Court has held that to "conduct" the enterprise's affairs means to "lead, run, manage, or direct" the affairs, and that to "participate, directly or indirectly, in the conduct of such enterprise's affairs" means to take part in the direction
of the affairs. Reves v. Ernst & Young, 507 U.S. 170, 177-79, 113
S. Ct. 1163 (1993). The Thomas Claimants have not alleged that the
Debtor participated in the operation and management of the enterprise.
Id. 507 U.S. at 185. Although the Debtor may have been "involved" in
the enterprise and may have "aided and abetted" and "assisted" its
alleged racketeering activity, the Court concluded that that is not
enough. Id. at 177-78. Rather, the Supreme Court held "that 'to conduct or participate, directly or indirectly, in the conduct of such
enterprise's affairs,' one must participate in the operation or management of the enterprise itself." Id. at 185 (citation omitted). All
indications are that Mr. Wilkinson was the only person satisfying this
requirement. It was Mr. Wilkinson who used his control over the Debtor
to assist him in obtaining loans from the Thomas Lenders; there are no
allegations that it was the Debtor who exerted control over the enterprise to obtain the loans. The court, therefore, estimates the value
of the Thomas Claimants's claim under § 1962(c) at zero.
limiting the scope of the evidentiary hearing in this matter to the
Thomas Claimants' claim for common law fraud and the Liquidating Supervisor's defense of comparative fault.
1. The court previously rejected the Thomas Claimants' conversion
2. Although the Liquidating Supervisor also uses the term "contributory negligence," his reply brief makes clear that he does not use
the term in its technical sense, meaning the defense that a plaintiff
is barred from any recovery for negligence if the injury resulted even
in part from the plaintiff's own negligence. (Reply Memo. in Supp. of
Mot. for Estimation of Thomas-Related Claims, at 5.)
3. Other courts within the Sixth Circuit have applied federal conflict of laws rules in bankruptcy cases, concluding that the Sixth
Circuit would overrule Milam in an appropriate case in light of the
enactment of the current Bankruptcy Code in 1978 and the Supreme
Court's decision in Vanston Bondholders Protective Committee v. Green,
329 U.S. 156, 161 (1946). Limor v. Weinstein & Sutton (In re SMEC,
Inc.), 160 B.R. 86, 89-91 (M.D. Tenn. 1993); Briggs Elec. Contracting
Servs., Inc. v. Elder-Beerman Stores Corp. (In re Elder-Beerman Stores
Corp.), 221 B.R. 404, 408 (Bankr. S.D. Ohio 1998). Note that Elder-Beerman held that the forum state's choice of law rules would be applied as the federal choice of law rules "where the case, while heard
in a case arising out of federal question jurisdiction, could have
been heard independently in a state court forum and is not reliant on
federal bankruptcy law principles." Id. Thus, here, the reasoning of
the Elder-Beerman court would result in the application of Kentucky
choice of law rules even if Milam was not the law in this circuit.
4. The Thomas Claimants rely on the "majority rule" according to
the Restatement (Second) of Torts and on a treatise. The Restatement
section they cite relates to contributory negligence, not comparative
fault. See Restatement (Second) of Torts § 467 Special Note (pointing out
that principles of contributory negligence have been superseded by
comparative fault statutes in many states). The cited treatise, according to the Thomas Claimants, takes the position that it should be
the Kentucky rule that "a plaintiff's negligence is not grounds for
apportioning fault against the plaintiff when the defendant is guilty
of an intentional tort." (Resp. of Thomas Claimants to Mot. for Estimation of the Thomas-Related Claims, at 13.) The Thomas Claimants did
not provide the court with a copy of the discussion, but indicate that
the author's opinion is based on an Illinois Supreme Court decision.
However, that decision was made under the common law of comparative
negligence, and relied in part on the public policy represented by the
Illinois comparative fault statute ultimately enacted. That statute
was limited by its own terms to "actions based on negligence, or product liability based on strict tort liability," Burke v. 12 Rothschild's Liquor Mart, Inc., 593 N.E.2d 522, 527 (Ill. 1992) (quoting
Section 2-1116 of the Illinois Code of Civil Procedure), while the
Kentucky statute applies "[i]n all tort actions, including products
liability actions." The policies upon which the Illinois court relied
(and the Restatement) cannot supersede the express language of KRS
Section 411.182.
5. In addition, depending on the nature and extent of such fault,
it could also have the effect of negating the "reliance" element of
6. Although this case involves debts that the Thomas Claimants
contend were fraudulently induced, they do not constitute "unlawful
debts," within the meaning of RICO, because they are not gambling
debts and are not claimed to be usurious. 18 U.S.C. § 1961(6).