Opinion ID: 2720468
Heading Depth: 3
Heading Rank: 1

Heading: Defining a Civil RICO “Injury”

Text: Before applying the facts, Kroenlein asks us to resolve a threshold question: what is a civil RICO “injury”? Does it include merely discovery of the harm (the loss of beer), or discovery of the harm plus the source of the harm (who was causing the losses)? Kroenlein argues that, under Rotella, the statute of limitations does not begin to run until the plaintiff discovers who inflicted the injury. Under this theory, the Aldens were not aware of the injury to their business until August 31, -16- 2007, when Mr. Alden confirmed that Kirchhefer was stealing beer, or at latest December 2010, when they first discovered Halligan and Bowen’s involvement in the scheme. The Supreme Court defined a civil RICO “injury” as the “harm from the predicate acts” that constitute racketeering activity. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 495 (1985) (“Given that ‘racketeering activity’ consists of no more and no less than commission of a predicate act, § 1961(1), we are initially doubtful about a requirement of a ‘racketeering injury’ separate from the harm from the predicate acts.”). A RICO predicate act includes “any act which is indictable under . . . section 1343 (relating to wire fraud).” 18 U.S.C. § 1961(1)(B). According to the Court’s logic in Sedima, then, discovery of an “injury” would require only knowledge of the harm resulting from the predicate act—here, accounting losses resulting from Kirchhefer’s alleged wire fraud—not who has committed the harm. Rotella further supports the notion that discovery of a RICO “injury” does not require a plaintiff to definitively determine who actually committed the predicate act to trigger the limitations period, so long as the plaintiff is aware of his injury. In that case, the Supreme Court specifically rejected the “injury pattern” discovery accrual rule that some circuits had adopted. Under the “injury pattern” rule, a civil RICO claim would accrue only when the plaintiff “discovers, or should discover, both an injury and a pattern of RICO activity.” Rotella, 528 -17- U.S. at 553. Courts applying the injury-pattern rule required discovery of the pattern of racketeering activity because a “pattern of racketeering activity” is a required element of § 1962(c)—the RICO subsection at issue in Rotella. 6 See, e.g., Granite Falls Bank v. Henrikson, 924 F.2d 150, 154 (8th Cir. 1991), overruled by Rotella, 528 U.S. at 553; Bath v. Bushkin, Gaims, Gaines & Jonas, 913 F.2d 817, 820 (10th Cir. 1990), overruled by Rotella, 528 U.S. at 553. But in Rotella, the Supreme Court explained that, to bring a civil RICO claim, the plaintiff need only have discovered the injury, not the other elements of the RICO claim: [I]n applying a discovery accrual rule, we have been at pains to explain that discovery of the injury, not discovery of the other elements of a claim, is what starts the clock. In the circumstance of medical malpractice, where the cry for a discovery rule is loudest, we have been emphatic that the justification for a discovery rule does not extend beyond the injury. 528 U.S. at 555 (emphases added). Rotella rejected the injury-pattern rule in part because of the Court’s concern with lengthening the civil RICO limitations period. The Court found that such a rule would potentially allow “proof of a defendant’s acts even more remote from time of trial and, hence, litigation even more at odds with the basic policies of all limitations provisions,” id., and would 6 Violation of § 1962(c) requires proof of: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima, 473 U.S. at 496. -18- “clash with the limitations imposed on Clayton Act suits” which the Court historically used to interpret RICO. Id. at 557. Rotella therefore explains that a plaintiff need not know all the elements required to bring a legal claim under civil RICO to start the limitations period running. Thus, a RICO victim need not have actual knowledge of exactly who committed the RICO predicate act resulting in the injury for a civil RICO claim to accrue. 7 Our interpretation of Rotella is supported by precedent. For example, in a recent case, we considered a RICO claim brought by a farmer against several defendants, one of whom supplied the farmer with farm buildings and one who supplied him with replacement parts. Cory v. Aztec Steel Bldg., Inc., 468 F.3d 1226 (10th Cir. 2006). In that case, one of the farmer’s buildings collapsed in 1995 and was repaired with parts from a replacement parts company. Then, in 1999, another building collapsed, and, in 2001, the building that had been repaired in 1995 again collapsed. An investigation later showed the buildings 7 Kroenlein argues that Rotella’s citation to an FTCA case, United States v. Kubrick, means that Rotella impliedly required that a plaintiff at least know “who has inflicted the injury.” Aplt. Br. at 7. But Rotella merely cited Kubrick for the proposition that a plaintiff need not know all the elements of his claim for a claim to accrue. Rotella, 528 U.S. at 555–56. Knowledge of the perpetrator’s identity was not at issue in either Rotella or Kubrick. What was at issue in Kubrick was whether a victim who knew both the injury and the cause of the injury—in that case, administration of a particular drug—had the facts necessary to trigger the accrual of a malpractice claim, even if the victim did not know that the administration of the drug was negligent. -19- were defectively designed. We found that the farmer’s claim was barred by RICO’s statute of limitations because the farmer was “aware of his injury no later than June 1999, when the second building collapsed,” id. at 1234, irrespective of the confusion as to what the actual source of the injury was—defective design or defects in the replacement parts. In this case, the injury from the alleged predicate act of wire fraud was J&B’s accounting losses based on beer it paid for but never received. Kroenlein asks us to hold that the Aldens could only have discovered their injury once the losses were traced to a particular individual, Kirchhefer. Kroenlein claims that a plaintiff cannot be expected to file a lawsuit if he is unaware who actually injured him. We disagree. The point of the injury-discovery rule is to start the clock ticking on the period in which a reasonably diligent person would determine the essential elements of a claim; the rule does not obligate the victim to file suit at that moment. That is why in Cory we found the clock started ticking even though the victim did not definitively know the precise identity of those who caused his injury. Here, once the Aldens were aware that one of several individuals—one of several beer distributors or an employee—could be the cause of their injury, they had four years to determine the proper person against whom to file suit. Contrary to Kroenlein’s claims, the Aldens need not have definitely determined which individual of the many possible candidates was in fact responsible for their injury -20- before their claims could accrue. Rather, their RICO claim accrued once they became aware of the injury to their business—theft of J&B’s beer. But even if knowledge of the perpetrator’s identity were required for a claim to accrue, the discovery rule does not excuse the Aldens from their duty to exercise reasonable diligence to determine the identity of the thief. “[T]o know you’ve been injured and make no effort to find out by whom is the very laxity that statutes of limitations are designed to penalize.” Cancer Found., Inc. v. Cerberus Capital Mgmt., LP, 559 F.3d 671, 676 (7th Cir. 2009). As we explain below, the Aldens did not exercise reasonable diligence to determine who was stealing from them once they were aware of the possibility of theft. Accordingly, regardless of the definition of a RICO “injury” we adopt, the injury-discovery rule bars Kroenlein’s claims. 2. The Injury-Discovery Rule Bars Kroenlein’s Claims In applying the injury-discovery rule, we ask not only when a plaintiff actually discovers his injury, but also when a reasonably diligent plaintiff would have discovered the injury. Rotella, 528 U.S. at 552–53. The second prong is an objective inquiry. See Mathews v. Kidder, Peabody & Co., 260 F.3d 239, 252 (3d Cir. 2001); Forbes v. Eagleson, 228 F.3d 471, 484 (3d Cir. 2000); see also Arvayo, 766 F.2d at 1422. The limitations period generally will not begin to run until the plaintiff either has actual or inquiry notice of the injury. Koch v. Christie’s Int’l PLC, 699 F.3d 141, 151 (2d Cir. 2012). -21- “[A] plaintiff is on inquiry notice whenever circumstances exist that would lead a reasonable [plaintiff] of ordinary intelligence, through the exercise of reasonable due diligence, to discover his or her injury.” Mathews, 260 F.3d at 251 & n.15; see also Sterlin v. Biomune Sys., 154 F.3d 1191, 1201 (10th Cir. 1998) (noting that the limitations period in securities fraud actions begins to run “once the investor, in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud”). The plaintiff need not discover all elements of the fraudulent scheme to be on notice of the potential of fraud. See Ebrahimi v. E.F. Hutton & Co., 852 F.2d 516, 523 (10th Cir. 1988) (“Inquiry notice is triggered by evidence of the possibility of fraud; it does not require full exposition of the fraud itself.” (emphasis added) (citations omitted)). Once a plaintiff has inquiry notice of facts that would suggest to a reasonable person that he has been injured, the plaintiff has a duty to commence a diligent investigation concerning that injury. See Dodds v. Cigna Sec., 12 F.3d 346, 350 (2d Cir. 1993) (“[W]hen the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry.” (citations and internal quotation marks omitted)); see also Arvayo, 766 F.2d at 1421–22 (“[O]nce the plaintiff [is] informed as to the probable connection between his [injury] and [its cause],” the burden is on the plaintiff to “discover not only whether [defendants] breached a duty to him, but -22- also to discover in the first instance whether there was a causal connection between their actions, or inactions, and his injury.” (citations omitted)). If a RICO plaintiff “does begin or has begun to inquire once the duty arises,” we must determine “when a reasonably diligent investigation would have revealed the injury to a person of reasonable intelligence, and the statute of limitations begins to run on that date.” Koch, 699 F.3d at 153. But when a RICO plaintiff “makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose.” Id. (citations and internal quotation marks omitted). The undisputed facts show that, if the Aldens had been reasonably diligent, they would have discovered their injury before August 31, 2007. By the fall of 2005, Mr. Alden was aware that there were significant discrepancies between “the statements, the invoices of Orrison, and the beer sales from J&B” that were not “easily explained just by seasonal discrepancies.” App. 1502. He also admitted that, before March 2007, he “had sort of subliminally known that there was something wrong with the numbers on beer sales and they didn’t add up or look right, but in 2007, [he] began to take a hard look at it.” App. 1497. A reasonable person in Mr. Alden’s position, knowing by the fall of 2005 that the losses were not due to seasonal variations and there was a possibility of distributor theft, would have made some inquiry into the cause of the losses. But the undisputed facts show that Mr. Alden did not exercise reasonable due diligence into the cause of J&B’s beer losses. Rather, he “wondered about it” -23- until March 2007, App. 1561, and only began to inventory the beer in the store on August 30, 2007. By September 10, 2007 (the third inventory he performed), he “had stopped inventorying Coors products, because they never came up short, and I realized that my thefts were occurring from Orrison products.” App. 1476–77. By his own admission, then, eleven days and two inventory counts were all it took to reveal that the losses were due to Orrison deliveries and not to theft by other distributors, employee error, or accounting error. If some inquiry is made after being put on inquiry notice, we will impute knowledge of what a person “in the exercise of reasonable diligence should have discovered.” Koch, 699 F.3d at 151 (citations and internal quotation marks omitted). The undisputed evidence here shows that reasonable diligence would have quickly revealed that the beer losses were due to theft by an Orrison employee. Reasonable jurors could not disagree that it would have been feasible to complete such an investigation well within four years. Kroenlein maintains that it was impossible for Mr. Alden to have discovered Kirchhefer’s theft because he was basically an “absentee landlord” between 2004 and 2007 and his involvement in J&B’s operation was a “very hit or miss proposition.” Aplt. Br. at 11. 8 Kroenlein argues that it was only possible 8 Kroenlein maintains that living in Wheatland, sixty miles away, would also have prevented Mrs. Alden from taking an inventory because of her schedule. The record does not clearly indicate whether Mrs. Alden was employed full-time during 2004 to 2007, although Kroenlein indicated at oral argument that she, too, (continued...) -24- for Mr. Alden to “creep around the store after the store had closed at midnight and inventory the beer products located in his store” once he had moved to Torrington; otherwise, Mr. Alden would have had to “miss two days of work” to conduct such an inventory. Aplt. Br. at 11, 17. But the fact that the Aldens lived somewhere else does not affect our determination of what is objectively reasonable. What is more, Kroenlein offers no explanation why Mr. Alden was unable to take an inventory of the store until almost eight months after he moved to Torrington. The standard is an objective one, and a reasonable business owner equipped with the knowledge of loss would undertake an investigation to determine the cause of loss instead of waiting almost two years to take any action at all. See Mathews, 260 F.3d at 252 (“It is enough that a reasonable [plaintiff] of ordinary intelligence would have discovered the information and recognized it” as an indication of potentially fraudulent activity); see also Arvayo, 766 F.3d at 1422 (“[T]he question whether the Arvayos were ‘reasonably diligent’ [in inquiring into the cause and source of their injury] is of course an objective one.”). In sum, we agree with the district court that Kroenlein’s claims are barred by civil RICO’s four-year statute of limitations. 8 (...continued) was employed full-time during that period. -25-