Opinion ID: 526781
Heading Depth: 2
Heading Rank: 2

Heading: The Alleged RICO Violation

Text: 19 Plaintiffs claim that Coronet's and Elston's activities violate 18 U.S.C. Secs. 1961-1968, the RICO statute. To support a RICO claim, plaintiffs must prove that Elston and Coronet received income from a pattern of racketeering activity and used the income in an enterprise engaged in interstate commerce. 18 U.S.C. Sec. 1961. Plaintiffs claim that the racketeering activity consisted of wire and mail fraud in violation of 18 U.S.C. Secs. 1341, 1343. 20 To prove mail and wire fraud, plaintiffs must show that defendants knowingly schemed to defraud plaintiffs of their property and used the mail or wire services in furtherance of the scheme. See United States v. Wellman, 830 F.2d 1453, 1461 (7th Cir.1987); United States v. Shelton, 669 F.2d 446, 454-55 (7th Cir.1982), cert. denied sub. nom. Bledsoe v. United States, 456 U.S. 934, 102 S.Ct. 1989, 72 L.Ed.2d 454 (1982). The scheme need not be fraudulent on its face, but must involve some sort of fraudulent misrepresentations or omissions calculated to deceive persons of ordinary prudence and comprehension. Wellman, 830 F.2d at 1462. 21 While plaintiffs have presented strong arguments as to why the use of a polygraph test is unfair, and possibly illegal under state law, their explanation of how Coronet's and Elston's activities fit within the mail and wire fraud statutes is muddled. They allude to two overlapping theories: Coronet and Elston knew that polygraph testing is suspect but induced claimants to take polygraph tests in order to defraud a certain percentage of claimants of their rightful indemnity. Coronet and Elston defrauded plaintiffs of their claims by intentionally misrepresenting to plaintiffs that they must take the polygraph test when in fact plaintiffs were not obligated to take the test. 2 22 A district court must grant summary judgment when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In our review of a grant of summary judgment, we are to draw all reasonable inferences regarding the facts in the light most favorable to the nonmoving party. Donald v. Polk County, 836 F.2d 376, 379 (7th Cir.1988). If the nonmoving party, however, fails to establish the existence of an element essential to his case and on which he bears the burden of proof, summary judgment in favor of the moving party is proper. Davis v. Warden, Joliet Correctional Inst., 867 F.2d 1003, 1017 (7th Cir.1989). See also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). The nonmoving party cannot simply rely on its pleadings. Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir.1988). If the moving party demonstrates to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim, and the nonmoving party cannot muster sufficient evidence to make out its claim, a trial would be useless and the moving party is entitled to summary judgment as a matter of law. Celotex Corp., 477 U.S. at 331, 106 S.Ct. at 2556.
23 Plaintiffs first claim that Coronet and Elston represented to plaintiffs that their claims would be paid when, in fact, Coronet intended to deny a predetermined percentage of the claims through the use of a devise it knew to be inherently unreliable--the polygraph test--and pressured claimants to take polygraph tests in order to guarantee a certain number of failed claims. Coronet and Elston protest that plaintiffs never developed this theory at the district court level. The district court also noted that plaintiffs' argument was vague but stated, it would seem that there could be no deception absent there being more to the scheme than merely unjustified reliance on polygraph results. We acknowledge that plaintiffs' claim has metamorphosed through the course of this lawsuit but, because plaintiffs are the nonmovants, we will construe their argument as favorably as possible. 24 Plaintiffs present the following facts: Some studies indicate that polygraph tests are inherently unreliable. Coronet used polygraph testing as a matter of routine, even though its polygraph examiner was aware of the studies that criticized polygraph testing. Elston representatives told plaintiffs that they must or should take the polygraph test to receive payment on their claims. Half of the claimants appeared to take the test even though they were not legally or contractually obligated to take it. Coronet denied the claims of approximately half the people who took the test based solely on the test results. One insurance adjuster testified that Coronet paid only 25-40% of the claims of those who refused to take the test. 25 Plaintiffs have not established that Coronet and Elston engaged in fraud. Although ordinarily proof of fraud requires a showing of a false statement of material fact, coverage under the mail and wire fraud statutes is read broadly and extends beyond the limits of common law fraud. United States v. McNeive, 536 F.2d 1245, 1247 (8th Cir.1976). Cf. United States v. Anderson, 809 F.2d 1281, 1284 (7th Cir.1987) (defendant who engaged in bribery activities convicted under mail fraud statute). As the Supreme Court noted in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 488, 105 S.Ct. 3275, 3280-81, 87 L.Ed.2d 346 (1985), however, a civil RICO action may be brought against defendants who are indictable for one of the various federal crimes listed under the RICO statutes. Plaintiffs' proof of fraud, unchallenged, could not lead to an indictment of Coronet or Elston. Cf. McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 2881, 97 L.Ed.2d 292 (1987) (There are no constructive offenses; and before one can be punished, it must be shown that his case is plainly within the statute.). 26 Plaintiffs' case against Coronet and Elston is riddled with significant loopholes. Plaintiffs have not established that Coronet intended to defraud plaintiffs of their claims. See United States v. Mascio, 774 F.2d 219, 221 (7th Cir.1985) (Intent is a critical element of the mail fraud offense.). They present no proof that Coronet officials were aware of the studies that criticized polygraph testing. Although plaintiffs repeatedly emphasize that polygraph tests are inherently unreliable, the record shows that courts, the State of Illinois, and persons interested in polygraphy disagree on the issue. See Marsh v. Lake Forest Hospital, 166 Ill.App.3d 70, 73-74, 116 Ill.Dec. 612, 614-15, 519 N.E.2d 504, 506-07, appeal denied, 121 Ill.2d 571, 122 Ill.Dec. 439, 526 N.E.2d 832 (1988) (these cases [discussing polygraph tests] represent a recognition by the supreme court that polygraph results may be useful for some purposes other than as evidence at trial); Moskos v. National Ben Franklin Ins. Co., 60 Ill.App.3d 130, 134, 17 Ill.Dec. 389, 393, 376 N.E.2d 388, 392 (1978) (polygraph test results held admissible as evidence of good faith); Ill.Rev.Stat. ch. 111, paragraphs 2401-2432 (Smith-Hurd 1985) (Illinois licensing procedures for polygraph examiners). Coronet may innocently believe that polygraph tests are reliable. Plaintiffs have not demonstrated that Coronet officials knew polygraph testing was unreliable or presented any basis for a jury to conclude that Coronet purposely used what they knew to be an inherently unreliable device to avoid claims. 27 Plaintiffs have not established that Elston fraudulently administered the polygraph tests or falsely reported test results. Plaintiffs have not alleged that the polygraph examiner intentionally falsified his reports, nor have they provided this court with any statements regarding the truthfulness of answers that they gave on the polygraph examinations. 28 Furthermore plaintiffs want us to accept that Coronet's practices are so extreme that they can only be explained as fraudulent. We have no way of gauging, however, whether the number of claims that Coronet rejected is disproportionate with those denied by other insurance companies. Plaintiffs have not indicated that Coronet's profitability increased when it began to use polygraph tests or provided statistics regarding other insurance companies who deal with this type of insurance. Both parties at oral argument agreed that Coronet insures persons considered high risk because they have unfavorable histories or live in high risk areas of the community. In order to determine whether Coronet and Elston committed fraud, we need clear evidence that Coronet and Elston engaged in practices that were deliberately fraudulent. Although plaintiffs' counsel has characterized the results of the polygraph exams as shocking, plaintiffs must do more than assert their disbelief to withstand summary judgment. 3
29 Plaintiffs have asserted that, in addition to relying on polygraph tests, Coronet represented to claimants in violation of the law and the insurance contract that they must take the polygraph tests. Plaintiffs stated that Elston representatives told them that polygraph tests were required to receive payment. 30 The Illinois Department of Insurance has issued Regulation 919.60(d) that states: 31 No company shall require any insured to submit to a polygraph or other similar type of examination as a condition precedent to payment of a claim. The use of examinations under oath, sworn statements or similar procedures authorized under the terms of the applicable insurance contracts shall not be restricted. 32 Illinois courts have held that polygraph test results are inadmissible as substantive evidence in court, Marsh, 166 Ill.App.3d at 73-74, 116 Ill.Dec. at 614-15, 519 N.E.2d at 506-07, but are admissible to show an insurance company acted in good faith in denying an insured's claim, Moskos, 60 Ill.App.3d at 134, 17 Ill.Dec. at 392, 376 N.E.2d at 391. Under Illinois law then, Coronet may request a claimant to take a polygraph test but may not require a claimant to take the test as a condition for payment of the claim. Coronet may also use the polygraph test to show its good faith in denying a claim but may not present the polygraph test results as evidence that claimant presented a fraudulent claim. 33 It appears from the allegations that Coronet may have violated Illinois law, but not that Coronet and Elston committed fraud. As the district court carefully explained, 34 While it would be a violation of Regulation 919.60(d) to impose such a requirement [that plaintiffs take a polygraph test], [plaintiffs] did not testify that they were told Illinois law or the insurance policy required the polygraph examination. Therefore, their deposition testimony only supports a contract or insurance law claim, not a claim for fraud. Defendants were not being deceptive; under Coronent's (sic) practices--at least those practices shown by plaintiffs' evidence--the claims would indeed be denied if the request for a polygraph examination was refused. 35 Record at 77. If Coronet told plaintiffs that they must take a polygraph test in order to receive payment, Coronet violated state law. A violation of state law, however, does not necessarily indicate that the actions were also fraudulent. Cf. North Barrington Dev., Inc. v. Fanslow, 547 F.Supp. 207, 210 (N.D.Ill.1980) (the purpose of RICO is not to transform state law violations into federal violations, but to prevent interference with free competition). Coronet did not misstate its policy or represent that its policy was in conformity with Regulation 919.60(d). It did not attempt to conceal its reliance on polygraph tests. Cf. McNeive, 536 F.2d at 1252 (court found that mail fraud was not evident because defendant did not misrepresent the existence or the nature of the gratuity practice). Even when coupled with Coronet's practice of denying insurance claims based on test results, these representations do not rise to the level of a RICO violation. 36 Likewise, the letters that Coronet sent to claimants do not fraudulently compel the insured to take the polygraph tests. The insurance contract that covered plaintiffs' claims states that the insured shall cooperate with the company. The second letter, the more emphatic of the two letters, notified claimants that if they refused to take the polygraph test, they would be obligated to make a sworn statement regarding the loss. This letter alone did not mandate that claimants take the test. It requested, albeit in words intended to persuade claimants to take the test, that plaintiffs cooperate by taking the polygraph test. It provided an alternative, however, to those who refused to take the test. The letters did not misrepresent the law or the terms of the insurance contract, which allowed Coronet to elicit plaintiffs' cooperation and obtain a sworn statement of loss from a claimant. Because the letters did not compel claimants to take the polygraph tests or misrepresent the terms of the contract or Illinois law, they cannot support a RICO claim.