Court Opinion

ID: 185347
Source: CourtListenerOpinion
Date Created: 2011-02-05 02:30:53+00
Date Added: 2024-06-11T12:37:00.451164
License: Public Domain

235 F.3d 629 (D.C. Cir. 2001)
Western Associates Limited Partnership, individually and on behalf of Avenue Associates Limited Partnership, Appellantv.Market Square Associates, et al., Appellees
No. 00-7021
United States Court of Appeals  FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 28, 2000Decided January 5, 2001

Appeal from the United States District Court  for the District of Columbia (No. 97cv02452)
Barry Wm. Levine argued the cause for appellant.  With  him on the briefs was Richard J. Conway.
Paul B. Gaffney argued the cause for appellees.  With him  on the brief were Paul Martin Wolff, Joseph B. Tompkins,  Jr., and Christine Liverzani Prame. James D. Miller, Michael R. Smith and Peter M. Todaro entered appearances.
Before:  Henderson, Rogers and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Rogers.
Rogers, Circuit Judge:

1
In this appeal the court again  addresses the continuity prong of the "pattern of racketeering activity" requirement of the Racketeer Influenced and  Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et  seq.  Western Associates Limited Partnership ("Western")  sued various individuals and investors associated with Market  Square Associates (collectively, "Market"), its partner in the  development of a real estate project known as Market  Square.  Western alleged violations under RICO and District  of Columbia law based on an accounting dispute in the  partnership.  The district court, applying the multi-factor  analysis of Edmondson & Gallagher v. Alban Towers Tenants  Association, 48 F.3d 1260 (D.C. Cir. 1995), dismissed the  complaint pursuant to Fed. R. Civ. P. 12(b)(6) because Western failed to allege the requisite pattern of racketeering  activity.1  Western contends that in finding the "continuity"  element lacking, the district court erred by failing to focus on  the length of the time period during which Market's predicate  acts occurred, and misread Edmondson.  We disagree, and  accordingly we affirm.

I.

2
Market Square is a mixed-use property in downtown Washington, D.C. that consists of office and retail space and  residential condominium units.  In 1985, Western, a District  of Columbia limited partnership, formed Avenue Associates  Limited Partnership ("Avenue Associates") to "develop, own,  manage, and ultimately dispose of the Market Square Project."  In 1987, Western invited Market Square Associates, a  Washington, D.C. general partnership, to join Avenue Associates.  Upon completion of the construction of the project,  Western held a 30 percent limited partnership interest, and Market Square Associates owned a 67.5 percent limited partnership interest and a 2.5 percent general partnership interest.

3
In October 1997, Western filed suit in the United States  District Court for the District of Columbia, alleging that  beginning in 1988 and continuing for more than eight years  thereafter, Market repeatedly violated partnership agreements, transmitted fraudulent accounting statements, and  stole the value of Western's partnership interest.  At the  heart of the alleged fraud are alleged misrepresentations of  expected costs and profits that Market made in budget  projections for the Market Square project.  According to the  complaint, after Western was deceived into approving a  fraudulent budget in 1989, Market covered up its misrepresentations by exaggerating the economic viability of the project in annual financial statements.  Western alleged that  Market also violated the terms of the partnership agreement  regarding the priority of cash flow distribution by improperly  favoring itself over Western for cash flow disbursements, and  caused the partnership to repay loans for cost overruns that  Market alone was responsible for repaying.  Western asserted that as a result of Market's violations of the RICO Act,  Western had suffered over $89 million in damages.2

4
The following month, in November 1997, Western filed for  an injunction to prevent Market from transferring some of its  interests in the Market Square Project.  Relying on  Edmondson, the district court denied the request for an  injunction, ruling that because Western had alleged a single  scheme, a single discrete injury, and a single victim, Western  had not demonstrated the requisite "pattern of racketeering  activity" under § 1961(5) of the RICO Act, and thus, was  unlikely to succeed on the merits.

5
Subsequently, Western filed an amended complaint, increasing the number of schemes and victims alleged.  The Amended complaint alleges that Market conspired to commit  and engaged in four separate but related schemes to defraud  Avenue Associates, Western, and the general and limited  partners that make up Western.  The four schemes consist  of:  (1) the Revised Budget-Approval Scheme;  (2) the Cost Shifting Scheme;  (3) the Income Projection Scheme;  and (4)  the Going-Concern Scheme.

6
The four alleged schemes are briefly summarized as follows.  (1) The Revised Budget-Approval Scheme was a plot  to conceal cost overruns.  According to the complaint, Market  knew as early as April 1988 that the total cost of the project  would exceed the original budget, and improperly approved  and conspired to conceal cost increases.  In August 1989,  after 18 months, Market sent a revised budget to Western,  knowing that the cost projections in this budget were also  inaccurate.  Western relied on the false representations in  the revised budget and approved it in December 1989.  (2)  The Cost-Shifting Scheme addresses the priority of allocations and the continuing cost increases.  The partnership's  budgets called for costs to be divided into "guaranteed" and  "non-guaranteed" categories, and prohibited guaranteed cost  overruns from being repaid from partnership cash flow.  According to the complaint, Market circumvented these accounting restrictions by shifting guaranteed cost items into the  non-guaranteed category, used improperly authorized optional loans to cover these cost increases, and repaid these loans  out of partnership distributions.  This fraudulent scheme was  concealed by annual financial statements mailed to Western  each year between 1990 and 1996.  (3) The Income Projection  Scheme arises from Market's attempt to conceal the impact of  the budget overruns.  According to the complaint, in 1992, in  a series of financial documents, Market falsely represented  the expected revenues from Market Square over the next 15  years, overstated the value the cost increases had added to  the project, and deceived Western regarding the partnership's debt.  Due to these misrepresentations, Western refrained from suing appellees or pursuing other remedies.  (4)  The Going-Concern Scheme relates to a failure to provide  honest annual accounting statements.  The complaint alleges that from 1994 to 1996, Market sent Western financial statements that omitted a "going-concern clause," in an effort to  conceal Avenue Associates' burdensome debt.

7
According to the amended complaint, Western did not  become aware that the Market Square Project's financial  health was in jeopardy until early 1997, when it received a  financial statement indicating that the partnership was having  difficulty meeting its financial obligations.  This statement  also acknowledged that Market Square would not meet Market's 1992 income projections.  The amended complaint alleged that the four schemes included numerous violations of  the mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343,  and that these allegedly fraudulent acts violated § 1962(c) of  the RICO Act.  Western also alleged a violation of § 1962(d)  of the RICO Act, which prohibits conspiracy to violate  § 1962(c).  Finally, Western alleged common law claims of  fraud, civil conspiracy to defraud, breach of fiduciary duty,  aiding and abetting a fiduciary, and breach of contract, and  requested various types of injunctive relief, including access  to the records of Avenue Associates.

8
The district court granted Market's motion to dismiss  under Fed. R. Civ. P. 12(b)(6), based on Western's failure to  allege a "pattern of racketeering activity," as required by  § 1961(5) of the RICO Act.  Relying on similarities to  Edmondson, 48 F.3d 1260, the district court found Western's  RICO claims deficient because Western had alleged a single  fraudulent scheme, the single harm of a diminished partnership interest, and, at most, one set of victims.  The district  court rejected Western's argument that because it had alleged fraudulent acts over an eight-year period of time, it had  successfully distinguished Edmondson and established a pattern of racketeering activity.

II.

9
On appeal, Western contends that the district court misapplied Edmondson and overlooked the importance of the eighty ear time period during which the alleged fraud occurred. Our review of the district court's order dismissing the complaint is de novo.  The court assumes that the factual allegations in the complaint are true, but it is not bound by the  complaint's legal conclusions.  See Whitacre v. Davey, 890  F.2d 1168, 1168 n.1 (D.C. Cir. 1989).

10
A violation of § 1962(c) of the RICO Act consists of four  elements:  "(1) conduct (2) of an enterprise (3) through a  pattern (4) of racketeering activity."  Pyramid Securities  Ltd. v. IB Resolution, Inc., 924 F.2d 1114, 1117 (D.C. Cir.  1991) (quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479,  496 (1985)).  The RICO Act defines the term "pattern of  racketeering activity" as requiring the commission of at least  two predicate racketeering offenses over a ten year period. See 18 U.S.C. § 1961(5).  These predicate offenses are acts  punishable under certain state and federal criminal laws,  including mail and wire fraud.  See 18 U.S.C. § 1961(1)(B).

11
The Supreme Court has interpreted the pattern requirement to include two additional elements:  relatedness and  continuity.  H.J. Inc. v. Northwestern Bell Telephone Co., 492  U.S. 229, 239 (1989).  "To prove a pattern of racketeering a  plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of  continued criminal activity."  Id.  The Court further described the relatedness element as criminal acts that share  "similar purposes, results, victims, or methods of commission,  or otherwise are interrelated by distinguishing characteristics."  Id. at 240.  Continuity, the most relevant prong in the  instant case, may be proved by establishing either a "closed  period of repeated conduct" or a threat of future criminal  activity.  Id. at 241.  Western alleged a closed period of  continuous criminal activity between 1988 and 1997.

12
The Supreme Court in H.J. Inc. suggested that the relatedness and continuity concepts required further development in  subsequent cases, and urged a "natural and commonsense  approach to RICO's pattern element."  Id. at 237.  In  Edmondson, this court provided more guidance on the nebulous issue of what constitutes a pattern of racketeering activity.  Edmondson involved a real estate developer that accused  a tenants' association of illegally attempting to block the sale of the building in which members of the tenants' association  lived.  See Edmondson, 48 F.3d at 1263-64.  The real estate  developer alleged that the tenants had "exploited [a] quiettitle action, holding the building sale hostage and thereby  attempting to force [the developer] to pay them off."  Id.  Based on predicate acts such as extortion, bribery, and  perjury, the developer asserted that the association had violated RICO.  The court affirmed the dismissal of the RICO  claims because "the single scheme alleged--designed to frustrate one transaction and inflicting a single, discrete injury on  a small number of victims--fail[ed] to meet RICO's requirement of a 'pattern of racketeering activity.' "  Id. at 1263.

13
Edmondson identified six factors that a court should consider "in deciding whether a [RICO] pattern has been established."  Id. at 1265.  These factors are:  "the number of  unlawful acts, the length of time over which the acts were  committed, the similarity of the acts, the number of victims,  the number of perpetrators, and the character of the unlawful  activity."  Id. (quoting Kehr Packages, Inc. v. Fidelcor,Inc.,  926 F.2d 1406, 1411-13 (3d Cir. 1991)) (internal quotation  marks omitted).  Edmondson does not establish a rigid test,  but rather presents a flexible guide for analyzing RICO  allegations on a case by case basis.  The court in Edmondson  acknowledged that in some cases "some factors will weigh so  strongly in one direction as to be dispositive."  Id.  The court  also indicated that if a plaintiff alleges only a single scheme, a  single injury, and few victims it is "virtually impossible for  plaintiffs to state a RICO claim."  Id.

14
Analyzing the allegations of the amended complaint  through the six-factor lens of Edmondson inexorably leads to  the conclusion that Western failed to state a legally cognizable claim under RICO.  Edmondson provides a compelling  analogy because Western has alleged only a single scheme, a  single injury, and a single victim (or single set of victims). Thus, Western has failed to satisfy the continuity prong of  RICO's "pattern of racketeering activity" requirement.

15
The district court properly rejected Western's notion that  numerous schemes to defraud were perpetrated by Market.  "The court need not accept inferences drawn by plaintiffs if  such inferences are unsupported by the facts set out in the  complaint.  Nor must the court accept legal conclusions cast  in the form of factual allegations."  Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994) (citing  Papasan v. Allain, 478 U.S. 265, 286 (1986)).  As the district  court found, Market's conduct is more accurately characterized as a single effort to diminish the value of Western's  partnership interest, primarily by concealing cost overruns or  shifting the burden of financing them.  Indeed, Western's  four-scheme division appears specious on its face.  Comparing the amended complaint with the original complaint further demonstrates that Western's four purported schemes are  merely a cosmetic disguise of a single scheme.  The amended  complaint simply subdivides Western's initial allegations. Despite Western's protests that the court must focus on its  amended complaint, it is appropriate for the court to look  beyond the amended complaint to the record, which includes  the original complaint.  See Philips v. Bureau of Prisons, 591  F.2d 966, 969 (D.C. Cir. 1979);  5A Charles Alan Wright and  Arthur R. Miller, Federal Practice and Procedure § 1357 (2d  ed. 1990).  Thus, the district court properly observed not only  that the amended complaint merely "dress[ed] up the old  [complaint] with ... boilerplate RICO verbiage," but also  that "W[estern] appears to have distorted the allegations  against [Market] to create the appearance of multiple injuries  to multiple victims in an apparent effort to satisfy the statutory language of RICO."

16
It is true that depending on the specific circumstances a  single scheme may suffice for purposes of RICO.  The Supreme Court in H.J. Inc. rejected the idea that multiple  schemes must be proved to establish a pattern of racketeering activity.  See H.J. Inc., 492 U.S. at 240.  Our holding in  Edmondson is not to the contrary.  See Edmondson, 48 F.3d  at 1265.  The Supreme Court also emphasized that the concept of a racketeering "scheme" does not appear in the RICO  statute, and indicated that it should be applied with caution  because it is amorphous, highly elastic, and subject to "the  level of generality at which criminal activity is viewed."  H.J. Inc., 492 U.S. at 241 n.3.  However, the number of schemes  alleged remains a useful consideration.  For example, the  Supreme Court in H.J. Inc. stated that "proof that a RICO  defendant has been involved in multiple criminal schemes  would certainly be highly relevant to the inquiry into the  continuity of the defendant's racketeering activity."  Id. at  240.  Although the definition of "scheme" is imprecise, this  court can help to clarify how this term should be understood  by providing examples and by indicating "what lies beyond  [its] conceptual scope."  Apparel Art Int'l, Inc. v. Jacobson,  967 F.2d 720, 722 (1st Cir. 1992).

17
The instant case serves as an example of a vain attempt to  make a RICO claim seem more viable by parsing one scheme  into multiple schemes.  See Sil-Flo, Inc. v. SFHC, Inc., 917  F.2d 1507, 1516 (10th Cir. 1990).  Western's subdivision of  Market's alleged fraudulent activity is unavailing because the  four schemes are so similar in nature and purpose (i.e., they  involve contested bookkeeping entries), and they resulted in a  single harm rather than separate injuries.  See supra p. 632. For the term "scheme" to retain any utility, it cannot be so  easily invoked that it allows such closely related accounting  misrepresentations involving a single project to be considered  distinct schemes.  Under Western's interpretation of what  constitutes a scheme, almost any fraudulent act could be  subdivided to establish a RICO claim.  Cf. Apparel Art, 967  F.2d at 722-23.

18
Western's allegations of multiple victims are dubious for  similar reasons.  By alleging harm to each individual member  of its partnership, Western has again artificially subdivided  an aspect of its allegations in a transparent effort to make  Market's alleged fraudulent conduct seem more expansive. For the purposes of RICO pattern analysis, this set of victims  should be viewed as a single victim.  The district court  correctly noted that if "W[estern] was injured then naturally  those who have a financial interest in [Western] may be  affected."  To the extent that Western's partners were injured, they were injured indirectly, which does not make  them individual victims under RICO.  Cf. Wade v. Hopper,  993 F.2d 1246, 1250 (7th Cir.), cert. denied, 114 S. Ct. 193 (1993).  For example, in Wade, the court affirmed the dismissal of a RICO claim brought by shareholders against  alleged looters of a corporation, because the shareholders  sued individually, and not on the corporation's behalf.  See id. The court held that the RICO claim belonged only to the  corporation, and thus the shareholders were not the "proper  parties to bring a RICO claim for harm done to [the corporation]."  Id.  The court also faulted the plaintiff-appellants for  failing to "describe how they were directly and personally  injured by the alleged RICO violations."  Id.

19
Furthermore, the concept of a single set of victims is  distinct from a class of victims who are all similarly and  directly injured, and who should not be considered to be a  single victim.  For example, in H.J. Inc. the class of victims  was thousands of customers who were each directly injured  by a telephone company accused of charging unreasonable  rates.  Similarly, the single injury to Western was its diminished partnership interest, and Western does not appear to  have alleged multiple injuries.

20
Consequently, Western can meet the RICO pattern requirement only if it is able to effectively distinguish  Edmondson.  Western's primary contention in that regard  focuses on the length of time during which Market mailed and  faxed alleged financial misrepresentations.  The amended  complaint alleges dozens of predicate acts extending continually over an eight-year period, in contrast with Edmondson,  where the predicate acts extended only over three years, with  most of the acts occurring in a one-month period.  Western  relies on the Supreme Court's statement that "continuity is  centrally a temporal concept," H.J. Inc., 492 U.S. at 242, in  maintaining that the time difference between the two fact  patterns is sufficient to establish a dispositive difference. According to Western, the district court misinterpreted  Edmondson by not regarding the length of time over which  the predicate acts occurred as the most important factor in its  analysis.

21
This line of reasoning is unpersuasive for at least two  reasons:  it distorts both Supreme Court and D.C. Circuit  precedent.  First, Western misinterprets H.J. Inc. to the extent that it claims that time is such an important factor that an eight-yearspan must create a viable RICO action.  As the  district court explained, "[t]he mere longevity of a scheme or  schemes does not necessarily mean that a 'pattern of racketeering activity' is present."  H.J. Inc. requires that predicate  acts be committed over a period longer than "a few weeks or  months," but an eight-year time period, though highly relevant, is not dispositive.  Even if temporal length was supposed to be the most heavily weighted factor in the multifaceted Edmondson analysis (an assumption that is not necessarily mandated by H.J. Inc.), it may be trumped by other  factors of the Edmondson analysis.  Although H.J. Inc.  stresses that RICO is directed towards "long-term criminal  conduct," id., it also makes plain that a pattern can be defined  with "reference to a range of different ordering principles or  relationships between predicates, within the expansive bounds  set."  Id. at 239.

22
Second, Western misreads Edmondson to stand for the  proposition that "sporadic criminal activity ... does not satisfy H.J. Inc.'s mandate that predicate acts occur over a  substantial period of time."  Although the court took temporal length into account in Edmondson, its rationale relied  more on three other factors:  "single scheme, single injury,  and few victims."  Edmondson, 48 F.3d at 1265.  Instead of  concluding that the predicate acts were too sporadic, the  court stated in Edmondson that even an assumption that the  acts were committed over a three year time period could not  salvage the plaintiff's RICO claims.  See id.

23
Finally, not to be overlooked is the character of the alleged  racketeering activity.  The amended complaint describes a  business dispute about cost and income projections, and the  priority of allocations, rather than a wide-ranging series of  extensive criminal schemes.  Market's conduct can basically  be characterized as beginning with fraudulent budget underestimates, with the subsequent predicate acts serving as  attempts to cover up or shift the debt burden caused by cost  overruns.  Additionally, many of the predicate acts consist of  mailings of annual financial reporting statements that Market  was ostensibly obligated to provide to Western.  Because most of the predicate acts were mailings or faxes that relate  back to an initial misrepresentation, and because the parties'  dispute appears to be more in the nature of an ordinary  business deal gone sour, the activity encompassed by Western's amended complaint is similar to that in Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 21 (1st Cir. 2000),  where the First Circuit recently affirmed the dismissal of a  RICO claim.  In Efron, a real estate deal disintegrated into a  bitter dispute between partners, and one partner alleged that  he had been defrauded by financial misrepresentations in  mailings and faxes.  Affirming the dismissal of RICO claims,  the First Circuit held that "[t]aken together, the acts as  alleged comprise a single effort, over a finite period of time,  to wrest control of a particular partnership from a limited  number of its partners.  This cannot be a RICO violation." See id. at 21.

24
We recognize that the Supreme Court has interpreted the  RICO Act broadly, to include many "garden-variety fraud and  breach of contract cases" that might best be prosecuted  under state rather than federal law.  Sedima, 473 U.S. at 525  (Powell, J., dissenting).  The Court has acknowledged that  "[i]nstead of being used against mobsters and organized  criminals, RICO has become a tool for everyday fraud cases  brought against respected and legitimate enterprises."  Sedima, 473 U.S. at 499.  In the absence of congressional action  to narrow RICO's scope, the Supreme Court has refused to  countenance procedural limitations crafted by the courts of  appeals, and has refused to limit RICO to organized crime, or  to organizations rather than individuals.  See H.J. Inc., 492  U.S. at 244.

25
Nevertheless, we do not understand the Supreme Court to  disparage interpretingRICO's pattern requirement to guard  "against finding continuity too easily in the context of a single  dishonest undertaking involving mail or wire fraud."  See  Efron, 223 F.3d at 20.  As other circuits have observed,  "RICO claims premised on mail or wire fraud must be  particularly scrutinized because of the relative ease with  which a plaintiff may mold a RICO pattern from allegations  that, upon closer scrutiny, do not support it."  Id. This caution stems from the fact that "[i]t will be the unusual fraud  that does not enlist the mails and wires in its service at least  twice."  Al-Abood ex rel. Al-Abood v. El-Shamari, 217 F.3d  225, 238 (4th Cir. 2000);  see also United States Textiles, Inc.  v. Anheuser-Bush Cos., Inc., 911 F.2d 1261, 1268 (7th Cir.  1990);  cf. Tabas v. Tabas, 47 F.3d 1280, 1290 (3d Cir. 1995)  (en banc).  Although a RICO claim may be based only on  predicate acts consisting exclusively of mail and wire fraud,  scrutiny of such claims is necessary, and not inconsistent with  the breadth of RICO.  The pattern requirement thus helps to  prevent ordinary business disputes from becoming viable  RICO claims, with defendants subject to treble damages,  simply because the parties used the United States mails or a  fax machine to transmit contested financial documents. Thus, in Menasco, Inc. v. Wasserman, 886 F.2d 681 (4th Cir.  1989), the Fourth Circuit declined to find a RICO pattern  where an individual allegedly defrauded two corporations in  an oil and gas prospecting venture, because the perpetrator's  "actions were narrowly directed towards a single fraudulent  goal [and] involved a limited purpose."  Id. at 684.  In so  ruling, the Fourth Circuit observed that "[i]f the pattern  requirement has any force whatsoever, it is to prevent ...  ordinary commercial fraud from being transformed into a  federal RICO claim....  If we were to recognize a RICO  claim based on the narrow fraud alleged here, the pattern  requirement would be rendered meaningless."  Id. at 685  (citations omitted).

26
Neither the instant case nor Edmondson establishes a per  se rule for RICO pattern analysis.  Instead, the court continues to endorse a case-by-case, fact-specific approach.  The six  factors prescribed in Edmondson should be applied in a  manner that is fluid, flexible, and commonsensical, rather  than rigid or formulaic.  Holding that the district court did  not err in ruling that Western failed to allege a pattern of  racketeering activity is consistent with this method of analysis.3  Accordingly, we affirm the order dismissing the complaint.

Notes:

1
  After dismissing the RICO claims, the district court dismissed  the remaining claims for lack of subject matter jurisdiction.  See 28  U.S.C. § 1367(c)(3).

2
  Under RICO's civil provisions, treble damages may be sought  by "any person injured in his business or property," 18 U.S.C.  § 1964(c), by one or more of four types of "prohibited activities,"  which are defined in 18 U.S.C. § 1962.

3
  Western makes no contention that the district court erred in  dismissing the non-RICO claims for lack of subject matter jurisdiction.  In view of our disposition, we, like the district court, do not  reach Market's contention that the complaint is barred by the  statute of limitations.