Title: Allum v. Valley Bank of Nevada
Citation: 849 P.2d 297
Docket Number: 23394, 24604, 25594
State: Nevada
Issuer: Nevada Supreme Court
Date: March 24, 1993

849 P.2d 297 (1993) Robert L. ALLUM, Appellant, v. VALLEY BANK OF NEVADA, Valley Capital Corporation, Valley Mortgage Company, Kenneth Callahan, Arthur Daniel Ryssman and Perry DiLoreto, Respondents. No. 23394. Supreme Court of Nevada. March 24, 1993. *298 Kenneth J. McKenna, Reno, for appellant. Scarpello &amp; Alling, and Rick Oshinski, Carson City, for respondent DiLoreto. Vargas &amp; Bartlett and Debra A. Robinson, Reno, for respondents. PER CURIAM: Valley Mortgage Company ("VMC") employed Robert L. Allum ("Allum") as a loan officer.[1] VMC and the other defendants engaged in an illegal loan scheme involving "D.E. Program" loans which Allum would underwrite in the course of his duties as an FHA underwriter. VMC's loan scheme obtained investors' money by false pretenses because the loans did not comport with FHA guidelines as investors believed. Allum, because his duty was to underwrite the D.E. Program loans, believed he was liable for them. Allum attempted to internally resolve the illegal activity by informing VMC's head FHA underwriter and other VMC officers of the practice. In spite of Allum's efforts, VMC continued the illegal activity. In July 1989, Allum reported the activity to the FHA. VMC officers then engaged in a cover-up and subsequently conspired to and did terminate Allum's employment. Allum sued, alleging violations of Nevada RICO,[2] defamation, and wrongful termination. Throughout this litigation, Allum has claimed as damages his lost income following his wrongful termination. The district court dismissed Allum's Nevada RICO claim without prejudice on the ground that Allum had not been injured by a "predicate act"; that is, an act expressly prohibited by Nevada RICO. Allum filed an amended complaint alleging the same three causes of action. Finding that Allum's FHA underwriting status did not qualify him as a "public officer" under NRS 207.400(1)(g), the district court again dismissed Allum's Nevada RICO claim without prejudice. In his second amended complaint, Allum alleged that the defendants conspired to violate NRS 207.360(26), which then proscribed as a predicate Nevada RICO act obtaining money or property valued at $100 or more by false pretenses. Allum also alleged a violation of NRS 207.400(1)(g), which prohibits inducing the commission or omission of an act by a public officer in violation of his official duty. The district court again dismissed Allum's Nevada RICO claim, this time with prejudice. Allum appealed. Allum contends that the district court erred by dismissing his Nevada RICO claim without leave to amend. We conclude that under these facts Allum has failed to stateand is unable to statea claim upon which relief can be granted. Thus, we affirm the district court's judgment. Nevada RICO not only provides for criminal sanctions[3] against those who violate its provisions, but also provides a private civil action to recover treble damages for injuries caused by a violation of its substantive provisions. A potent provision, NRS 207.470(1), provides: NRS 207.400 provides: Unlawful acts; criminal penalties. Having reviewed the Nevada statutory scheme as well as federal court interpretations of RICO, we conclude that for a plaintiff to recover under Nevada RICO, three conditions must be met: (1) the plaintiff's injury must flow from the defendant's violation of a predicate Nevada RICO act; (2) the injury must be proximately caused by the defendant's violation of the predicate act; and (3) the plaintiff must not have participated in the commission of the predicate act. It is well-settled that to have standing as a RICO plaintiff, one's injury must flow from the violation of a predicate RICO act.[4]Cf. Hale v. Burkhardt, 104 Nev. 632, 764 P.2d 866 (1988). Allum originally alleged that VMC violated NRS 207.360(26), which then provided that "`Crime related to racketeering' means the commission of, attempt to commit or conspiracy to commit... [o]btaining possession of money or property valued at $100 or more ... by means of false pretenses." This crime, alleged Allum, was perpetrated against "investors seeking FHA quality loans." Crucially, *300 the crime was not committed against Allum. This issue has been addressed by numerous courts reviewing alleged violations of RICO. Indeed, the context of virtually every Court of Appeals decision cited in footnote 4, supra, was wrongful termination. Further, those cases arose following successful motions to dismiss. Because one of those cases, Reddy v. Litton Indus. Inc., 912 F.2d 291 (9th Cir.1990), is especially helpful in gaining an understanding of the issue at hand, a review of that case follows. Reddy was employed by Litton Industries, Inc. ("Litton") which was engaged in selling military hardware to Saudi Arabia. Reddy discovered an unlawful payment scheme between Litton and certain Saudi officials. Reddy reported the scheme to his superiors, who thereafter terminated Reddy's employment. Reddy sued Litton, alleging that he was wrongfully terminated because he refused to cover-up the illegal activity. Litton moved to dismiss for failure to state a claim. The federal district court found that Reddy lacked standing and granted Litton's motion with prejudice. Reddy appealed. Reddy, 912 F.2d at 292-93. The United States Court of Appeals for the Ninth Circuit affirmed. After noting that only harm caused by a predicate RICO act was compensable, the court stated: Reddy, 912 F.2d at 294. Like the plaintiff in Reddy, Allum's injury flowed from his wrongful termination. Wrongful termination, however, is not a predicate Nevada RICO act. Allum therefore lacks standing to sue under NRS 207.470(1). To recover under RICO, not only must the plaintiff's injury flow from a predicate act, but the plaintiff must show that the defendant's RICO violation proximately caused the plaintiff's injury. The most recent pronouncement in this area was made in Holmes v. Securities Investor Protection Corp., ___ U.S. ___, 112 S. Ct. 1311, 117 L. Ed. 2d 532 (1992). Holmes dealt with damages suffered by the Securities Investor Protection Corporation ("SIPC"). In 1970, Congress authorized the formation of SIPC by enacting the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa-78111. SIPC is a private nonprofit corporation of which most broker-dealers registered under § 15(b) of the Securities Exchange Act are required to join. Should SIPC determine that a member is unable to meet its obligations to its customers, SIPC may seek a "protective decree" in federal district court. Upon granting the petition, the district court appoints a trustee charged with liquidating the member's business. Holmes, ___ U.S. at ___, 112 S. Ct. at 1314. The trustee first returns all securities to their registered owners. Securities not registered to a customer are pooled together and divided ratably to satisfy customers' claims. Should the amount in the pool be inadequate to cover the claims, SIPC must advance up to $500,000 per customer to satisfy those claims. Id. Following a fraudulent manipulation scheme, SIPC advanced nearly $13 million to satisfy claims of injured customers. SIPC and the appointed trustees sued Holmes and others, alleging that defendants had conspired with others in a fraudulent stock manipulation scheme in violation of the Securities Exchange Act of 1934 and that this conduct amounted to a pattern of racketeering activity within the meaning of RICO. Id. at ___, 112 S. Ct. at 1315. The district court entered summary judgment for Holmes, partly on the ground that SIPC had failed to satisfy RICO's proximate cause requirement. The Ninth Circuit *301 reversed, rejecting the district court's analysis. The Supreme Court granted certiorari and reversed. Id. at ___, 112 S. Ct. at 1315-16. The RICO provision in issue stated that: 18 U.S.C. § 1964(c) (1988).[5] The Supreme Court acknowledged that this language could be interpreted to permit a plaintiff to recover simply by showing that he was injured "by reason of" a RICO violation and that the defendant's RICO violation was a "but for" cause of his injury. Holmes, ___ U.S. at ___, 112 S. Ct. at 1316. The Court recognized, however, that it was very unlikely that Congress meant to allow all factually injured plaintiffs to recover because the "by reason of" language of § 1964(c) was modeled after the Clayton Act which had long been interpreted to require proximate causation as a requisite to sue. Id. at ___ _ ___, 112 S. Ct. at 1316-18. The practical reason for requiring proximate causation under RICO was explained by the Court thusly: Holmes, ___ U.S. at ___, 112 S. Ct. at 1318 (citations omitted). In other words, to sue under RICO, the plaintiff's injury must be directly caused by the defendant's violation of a predicate RICO act. In most cases, the plaintiff will be the victim of the predicate act. Because our legislature patterned Nevada RICO after RICO, we conclude that the Nevada legislature intended a like result. Accordingly, we hold that to bring suit under Nevada RICO, the plaintiff's damages must be proximately caused by defendant's violation of a predicate Nevada RICO act. As discussed, the predicate act alleged by Allum was obtaining money by false pretenses. Hence, the injuries, if any, of the investors whose money was taken by VMC were proximately caused by a violation of a predicate act. Allum's loss of income, however, was caused by his termination following his refusal to perpetuate the predicate act. Allum was not the victim of the predicate act, and his loss of income was not proximately caused by the predicate act. Accordingly, Allum does not have a cause of action under Nevada RICO. Allum alleged that VMC violated NRS 207.400(1)(g), which provides that it is unlawful for any person to intentionally "promote or further the criminal objectives of a criminal syndicate by inducing the commission of an act or the omission of an act by a public officer o[r] employee which violates his public duty." Allum claims that his post as an FHA underwriter qualified him as a public officer and that notwithstanding the fact that he participated in the scheme by underwriting the D.E. Program loans, he has standing under Nevada RICO to sue those who induced him to violate his public duty. We need not decide whether Allum was a public officer because his participation in the illegal scheme, even though perhaps against his will, precludes him from recovering for damages caused by the scheme. We find the reasoning of the district court persuasive: We doubt that the legislature intended for one knowingly involved in an illegal scheme to be able to recover from the scheme's other participants. Because Allum participated in the illegal scheme by virtue of his underwriting, we conclude that he cannot rely on Nevada RICO to recover treble damages from VMC. Allum argues on appeal that the district court erred by dismissing his claim with prejudice. A district court's decision not to grant leave to amend will not be disturbed absent an abuse of discretion. Nelson v. Sierra Constr. Corp., 77 Nev. 334, 343, 364 P.2d 402, 406 (1961). Any attempt by Allum to amend his Nevada RICO claim would have been futile: "It is not an abuse of discretion to deny leave to amend when any proposed amendment would be futile." Reddy, 912 F.2d at 296. We affirm the judgment of the district court. [1] Because we are reviewing the grant of a motion to dismiss, we accept as true the complaint's factual allegations. Marcoz v. Summa Corporation, 106 Nev. 737, 801 P.2d 1346 (1990). [2] Nevada's racketeering statutes, found at NRS 207.350 through NRS 207.520, are patterned after the federal Racketeer Influenced and Corrupt Organizations, or "RICO," statutes, 18 U.S.C. §§ 1961-1968. Hale v. Burkhardt, 104 Nev. 632, 634, 764 P.2d 866, 867 (1988). The Nevada racketeering statutes are herein referred to as "Nevada RICO." [3] NRS 207.400, NRS 207.410, NRS 207.450. [4] Sedima v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985); Miranda v. Ponce Fed. Bank, 948 F.2d 41 (1st Cir.1991); Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir.1990); Cullom v. Hibernia Nat'l Bank, 859 F.2d 1211 (5th Cir.1988); Reddy v. Litton Indus. Inc., 912 F.2d 291 (9th Cir.1990); Morast v. Lance, 807 F.2d 926 (11th Cir.1987). [5] The similarities between NRS 207.470(1) and 18 U.S.C. § 1964(c) are clear.