Court Opinion

ID: 2994625
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:15:43.880142+00
Date Added: 2024-06-11T09:18:34.778157
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3938

Edward Stachon and Judy Stachon,

Plaintiffs-Appellants,

v.

United Consumers Club, Inc., et al.,

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 7020--Charles R. Norgle, Sr., Judge.

Argued April 18, 2000--Decided October 6, 2000

      Before Flaum, Chief Judge, and Ripple and Williams,
Circuit Judges.

      Williams, Circuit Judge. Plaintiffs-Appellants
Edward Stachon and Judy Stachon, on behalf of
themselves and a putative class of individuals
similarly situated, filed an Amended Class Action
Complaint charging Defendants-Appellees, United
Consumers Club, Inc. ("UCC"), and five of its
officers and/or directors, with violations of the
Racketeer Influenced and Corrupt Organizations
Act ("RICO"), 18 U.S.C. sec.sec. 1961 et seq.,
and the Illinois Consumer Fraud and Deceptive
Trade Practices Act, 815 Ill. Comp. Stat. 505/2.
Defendants-Appellees moved to dismiss the amended
complaint and the district court granted the
motion under Fed. R. Civ. P. 12(b)(6) for failure
to state a claim under RICO. After doing so, the
district court declined to maintain supplemental
jurisdiction over Appellants’ state law claim and
dismissed the action. We affirm.

I

      UCC, founded in 1978, is a "buying club," which
enters into agreements with manufacturers to sell
"first quality" merchandise to members at special
wholesale prices. Consumers join UCC by paying a
membership fee, which entitles them to purchase
merchandise from more than 700 brand name
manufacturers through UCC catalogues. UCC members
are purportedly able to obtain significant
savings on merchandise because of their
collective "buying power" in the UCC buying
system, which "eliminates the middleman and
overhead costs associated with conventional
retail, wholesale and discount houses."

      The gist of Appellants’ RICO claim is that
Appellees have fraudulently represented that UCC
members have access to first quality merchandise
at special wholesale prices. Appellants aver that
much of the merchandise ordered by UCC members is
of an inferior quality and is sold at higher than
wholesale prices. They further claim that
Appellees have misrepresented the buying power of
UCC by overstating its membership. According to
Appellants, they and other UCC members relied on
the false representations made by Appellees in
joining UCC.

       Appellants maintain that in furtherance of a
scheme to defraud consumers about the benefits of
UCC memberships, Appellees conducted and
conspired to conduct or participate in a pattern
of mail and wire fraud activity through an
enterprise made up of "Defendants, past and
present UCC franchisees, manufacturers and
wholesalers, and UCC members," in violation of
RICO. See 18 U.S.C. sec. 1962(c), (d)./1 The
district court ruled that Appellants failed to
plead the existence of the requisite RICO
"enterprise" and dismissed the amended complaint
under Fed. R. Civ. P. 12(b)(6) for failure to
state a claim. Appellants now challenge the
district court’s decision dismissing their RICO
claim.

II

      We review a district court’s decision to grant
a motion to dismiss under Rule 12(b)(6) de novo,
accepting the well-pleaded allegations in the
amended complaint as true and drawing all
reasonable inferences in favor of the plaintiffs,
here, the Appellants. See Biblia Abierta v.
Banks, 129 F.3d 899, 902-903 (7th Cir. 1997).
      We have previously declared that "a RICO
complaint must identify the enterprise." Richmond
v. Nationwide Cassel L.P., 52 F.3d 640, 645 (7th
Cir. 1995). Appellants allege an "association in
fact" enterprise made up of UCC, its franchisees,
its officers and/or directors, its members,
participating wholesalers, and participating
manufacturers. Appellees contend that Appellants
have not adequately alleged the existence of a
RICO enterprise.

      RICO defines an "association in fact" enterprise
as a "union or group of individuals associated in
fact although not a legal entity." 18 U.S.C. sec.
1961(4). While a RICO enterprise can be formal or
informal, some type of organizational structure
is required. See Richmond, 52 F.3d at 645;
Bachman v. Bears, Stearns & Co., 178 F.3d 930,
931 (7th Cir. 1999). A RICO enterprise must have
"an ongoing ’structure’ of persons associated
through time, joined in purpose, and organized in
a manner amenable to hierarchial or consensual
decision making." Jennings v. Emry, 910 F.2d
1434, 1440 (7th Cir. 1990) (citations omitted);
see United States v. Turkette, 452 U.S. 576, 583
(1981) (describing a RICO enterprise as "a group
of persons associated together for a common
purpose of engaging in a course of conduct" and
indicating that an enterprise is shown "by
evidence of an ongoing organization, formal or
informal, and by evidence that the various
associates function as a continuing unit").
Moreover, because a RICO enterprise is "more than
a group of people who get together to commit a
’pattern of racketeering activity,’" Richmond, 52
F.3d at 645 (internal quotation and citation
omitted); see Bachman, 178 F.3d at 932, there
must be "an organization with a structure and
goals separate from the predicate acts
themselves." United States v. Masters, 924 F.2d
1362, 1367 (7th Cir. 1991).

      In Richmond, supra, the court dismissed a RICO
action naming a string of entities, known and
unknown, as the RICO enterprise because "a
nebulous, open-ended description of the
enterprise does not sufficiently identify this
essential element of the RICO offense."/2 52
F.3d at 645. Notably, the alleged RICO enterprise
in Richmond provided no sign of "structure,
continuity and common course of conduct," so the
court dismissed the action. Id. at 645-46. More
recently in Bachman, supra, we dismissed another
RICO action because the plaintiff inadequately
alleged a RICO enterprise. There, a group of
unrelated individuals and corporations supposedly
got together to defraud the plaintiff, and the
court found that the plaintiff’s substantive
fraud allegations merely established a
conspiracy, not a RICO "organization" (or
enterprise).

      In light of Richmond and Bachman, we cannot
accept Appellants’ vague allegations of a RICO
enterprise made up of a string of participants,
known and unknown, lacking any distinct existence
and structure. While Appellants had ample
opportunity to adequately allege a RICO
enterprise, they fail to show that the acts
complained of in this case were the "work of an
organization, however loose-knit." Bachman, 178
F.3d at 932. When we liberally construe the
allegations in the amended complaint, the most
Appellants may be able to establish is a pattern
of racketeering activity through the purported
scheme to defraud consumers. To withstand
Appellees’ motion to dismiss, however, Appellants
must present something more than this and
assertions of conspiracy; otherwise, "every
conspiracy to commit fraud that requires more
than one person to commit is a RICO organization
and consequently every fraud that requires more
than one person to commit is a RICO
violation."/3 Bachman, 178 F.3d at 932. From
Bachman, we know that is not the law.

      Appellants argue that the alleged enterprise has
a distinct structure in that UCC’s "franchisees
recruit members to purchase merchandise at
special prices from certain wholesalers and
suppliers." This argument is undercut by
Appellants’ own acknowledgment that UCC’s
franchisees act under the "strict direction" of
Appellees. Appellants submit that Appellees
provide UCC’s franchisees with pre-written sales
scripts from which to recruit members. These
sales scripts presumably contain false
representations about UCC membership, which
necessarily sustains the alleged pattern of
racketeering activity.

      This court has repeatedly stated that RICO
plaintiffs cannot establish structure by defining
the enterprise through what it supposedly does.
See Jennings, 910 F.2d at 1440 ("[A]lthough a
pattern of racketeering activity may be the means
through which the enterprise interacts with
society, it is not itself the enterprise, for an
enterprise is defined by what it is, not what it
does."). Appellants essentially do this in
failing to offer the slightest sign of a "command
structure" separate and distinct from UCC (which
is not the purported enterprise). Id. at 1440
n.14. Here, the mere fact that UCC, for nearly 21
years, had business dealings with a wide
assortment of unnamed manufacturers, wholesalers,
and members in no way establishes that they
function with UCC as a continuing unit or as an
ongoing structured organization. Aside from
naming a string of participants, the amended
complaint offers no intelligible clue as to the
scope and duration of the enterprise itself; the
duration here presumably is a function of UCC’s
existence, but that is insufficient because UCC
is not the enterprise. In any event, Appellants
offer nothing to show that this group of
participants ever functioned as an ongoing RICO
organization. As a consequence, the RICO claim is
worthy of dismissal, notwithstanding whether the
participants had a common purpose./4

      Accordingly, Appellants’ RICO claim under
section 1962(c) cannot survive Appellees’ motion
to dismiss. Since Appellants fail to establish a
violation of section 1962(c), their section
1962(d) claim based on the same facts must fail
as well. See Midwest Grinding Co. v. Spitz, 976
F.2d 1016, 1026 (7th Cir. 1992).

III

      Because we agree with the district court that
Appellants did not adequately allege a RICO
"enterprise," we AFFIRM.

/1 Section 1962(c) provides in pertinent part:

It shall be unlawful for any persons . . .
associated with any enterprise . . . the
activities of which affect interstate commerce,
to conduct or participate, directly or
indirectly, in the conduct of such enterprise’s
affairs through a pattern of racketeering
activity. . . .

Section 1962(d) makes it unlawful "for any person
to conspire to violate the provisions of
subsection . . . (c)." With respect to a "pattern
of racketeering activity," violations of the
federal mail and wire fraud statutes, 18 U.S.C.
sec.sec. 1341, 1343, qualify as predicate acts of
racketeering under 18 U.S.C. sec. 1961(1).
/2 The court in Richmond indicated that the
challenged complaint "lists the three defendants
as part of ’Nationwide Group,’ a group that
’includes at least’ four other entities . . . and
that may include other businesses, three of which
are suggested and listed [in the complaint]. The
second enterprise [is made up of] Nationwide
Group plus unnamed car dealers." 52 F.3d at 645.

/3 We note further that the court has consistently
insisted that the RICO defendant or "person" be
separate and distinct from the enterprise, see
Richmond, 52 F.3d at 646-67, because "liability
depends on showing that the defendants conducted
or participated in the conduct of the
’enterprise’s affairs, not just their own
affairs,’ through a pattern of racketeering
activity." Reves v. Ernst & Young, 507 U.S. 170
(1993). In this respect, the alleged "enterprise"
is in no way strengthened by including UCC with
its officers and/or directors because UCC adds
nothing to the enterprise. See Bachman, 178 F.3d
at 932 ("A firm and its employees, or a parent
and its subsidiaries, are not an enterprise
separate from the firm itself"). Nor does the
inclusion of "past and present [UCC] franchisees"
benefit Appellants in establishing an enterprise.
See Fitzgerald v. Chrysler Corp., 116 F.3d 225,
226-28 (7th Cir. 1997) (plaintiff cannot
establish RICO enterprise by adding a
corporation’s franchises to the corporation); see
also Richmond, 52 F.3d at 647 (following
Brittingham v. Mobil Corp., 943 F.2d 297 (3d Cir.
1991)).

/4 While the RICO claim fails because the enterprise
lacks the requisite structure, we nonetheless
note the questionability of whether the
participants shared a purpose "to provide an
unparalleled opportunity for consumers to save
money, save time, and ultimately improve their
quality of life." There is nothing in the amended
complaint suggesting that the business dealings
which UCC conducted with manufacturers,
wholesalers, and members promoted such a purpose;
even viewing the allegations in a light most
favorable to Appellants, diverse parties, such as
these, customarily act for their own gain or
benefit in commercial relationships. Given the
commercial nature of the various parties’
relationships with UCC and the independent
interests necessarily governing those
relationships, the amended complaint fails to
dispel the notion that the different parties
entered into agreements with UCC for their own
gain or benefit. That this fraud action was even
filed by Appellants, the supposed fraud victims,
underscores, in our view, the improbability that
the enterprise had a common purpose to benefit
consumers (or UCC members) as a whole; indeed, it
is somewhat improbable that UCC members would act
in concert with Appellees (and countless unnamed
entities) to perpetrate fraud on other
unsuspecting consumers.