Court Opinion

ID: 2994522
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:15:11.989751+00
Date Added: 2024-06-11T15:02:51.380593
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-2126

State of Illinois ex rel. Walter E. Ryan
and Bernard McKay,

Plaintiffs-Appellants,

v.

Terry Brown et al.,

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 91 C 3725--John A. Nordberg, Judge.

Argued February 16, 2000--Decided September 19, 2000

  Before Kanne, Diane P. Wood, and Evans, Circuit
Judges.

  Diane P. Wood, Circuit Judge. Plaintiffs Walter
E. Ryan and Bernard McKay, acting in their
capacity as taxpayers and citizens of the State
of Illinois, brought this suit against Brown
Leasing Company, Terry N. Brown, and other
parties not involved in this appeal, seeking to
recover damages under the Racketeer Influenced
and Corrupt Organization Act, or RICO, 18 U.S.C.
sec.sec. 1962(c) and 1964(c), on behalf of the
State of Illinois. The Brown defendants allegedly
inflicted these damages as part of a complex
bribery scheme that involved the State Treasurer,
Jerome Cosentino, who made large deposits of
state money in non-interest bearing accounts at
the Cosmopolitan Bank of Chicago in exchange for
various benefits. The district court concluded,
upon the Brown defendants’ motion for summary
judgment, that the plaintiffs could not show the
necessary two predicate acts to support a claim
under sec. 1962(c), and in the alternative that
the plaintiffs had also failed to produce
sufficient evidence of causation. It therefore
granted summary judgment for the defendants. We
affirm, but on the more fundamental ground that
the plaintiffs did not have standing under RICO
to bring this claim.

I
  Plaintiffs contend that the RICO scheme began
in 1987 when various officers of Cosmopolitan
Bank bribed the then State Treasurer, Cosentino,
with commercially unreasonable loans in order to
induce him to deposit huge sums of state monies
with them. It began by making direct loans to
Cosentino and his insolvent trucking company. The
bank later allowed Cosentino’s companies to
engage in massive overdrafts and kiting, shifting
money between Cosmopolitan and Drovers Bank. In
May 1987, Cosentino reciprocated by beginning to
deposit those funds in non-interest bearing
accounts at Cosmopolitan. By 1989, the State had
deposited some $23 million in both interest
bearing and non-interest bearing accounts at the
bank. By June of 1989, Cosentino had accumulated
overdrafts and other indebtedness to Cosmopolitan
equaling about $1.95 million.

  Terry Brown, owner of Brown Leasing, was
Cosmopolitan’s biggest customer. Officers of the
bank, including James Wells, Gerald J.
DeNicholas, and Alex Vercillo, decided that Brown
could help Cosentino out. Accordingly, in June
1989, DeNicholas approached Brown and asked him
to make a loan to Cosentino for $1.95 million. He
explained that Cosmopolitan itself could not make
the loan because it would have violated federal
lending limits. Knowing this, Brown nonetheless
agreed to the deal. The parties executed a
written promissory note that evidenced Brown’s
loan to Cosentino; the note was secured by a
standby letter of guarantee from Cosmopolitan’s
holding company, as well as by Wells’s signature.

  Perhaps this was typical of Cosmopolitan’s
attitude toward federal banking regulations;
perhaps not. But in the spring of 1990, federal
authorities began investigating the bank for
misuse of bank funds by Wells. In the middle of
all that, and at Cosmopolitan’s request, Brown
agreed to restructure the loan to Cosentino and
to replace the original promissory note that both
Cosentino and Wells had signed. This was done,
plaintiffs assert, to try to put some distance
between Cosentino and Wells and to prevent the
public from learning about the broader scheme
between the two. As restructured, the original
promissory note was replaced with four promissory
notes from Cosentino and three of Wells’s
associates. The bank’s days, however, were
numbered: in May 1991, the Comptroller of the
Currency closed it down and appointed the FDIC as
receiver.

  By acting as a conduit for the improper loans
to Cosentino, the Brown defendants (according to
the plaintiffs) violated quite a number of laws.
Initially, however, it was they who brought suit.
Just before Cosmopolitan shut down, Brown
realized that he had an uncollectible note for
nearly $2 million. He sued the bank in Illinois
state court, but when the FDIC took it over, that
case was removed to federal court (along with all
other pending state court actions against the
bank). Brown’s suit was dismissed. See Brown
Leasing Co. v. FDIC, No. 91 C 3729, 1992 WL
186054 (N.D. Ill. July 28, 1992). In the
meantime, the plaintiffs made a demand upon the
Illinois Attorney General to pursue all
wrongdoers in the scheme; upon his refusal of
their demand, they brought a taxpayer suit in
state court to recover the State’s losses (items
such as lost interest and the salaries of the
allegedly corrupt officials). The defendants
removed their case as well, which is when
plaintiffs amended their complaint to add civil
RICO charges under sec. 1962(c). Those charges
are the only matter now before us; all other
claims have been dismissed and have been
abandoned on appeal.

II

  The original statute under which the plaintiffs
filed suit in state court is the Citizens Actions
provision of 735 ILCS 5/20-104. That section
permits a private citizen to bring an action to
recover damages authorized in Article XX of the
Illinois Code of Civil Procedure. Article XX in
turn deals with "recovery of fraudulently
obtained public funds." Central to its
application, of course, is the receipt of
"compensation, benefits, or remuneration" from
the State or from any local government unit. See
735 ILCS 5/20-102 ("refunds"); 5/20-103
("repayment--civil penalties--lien"). The
district court initially concluded that the
plaintiffs could not use the Citizens Action
provision, 5/20-104, because they had neither
alleged that the Brown defendants had received
any compensation, benefits, or remuneration from
the State, nor had they alleged a violation of
the refund section. Later, the court reversed its
conclusion that they were not entitled to sue,
finding that they had such a right under the
Illinois common law public trust doctrine. Ryan
v. State of Illinois, No. 91 C 3725, 1995 WL
516603 (N.D. Ill. Aug. 28, 1995). (In this court,
they appear to rely on both theories.)

  Earlier, while the FDIC was still involved in
the litigation, the court had also concluded that
the plaintiffs had standing to sue in the name of
the State of Illinois under the federal RICO
statute. Ryan v. State of Illinois, No. 91 C
3725, 1993 WL 147416 (N.D. Ill. May 3, 1993). The
FDIC there had argued that the plaintiffs had
been injured only indirectly, if at all, and thus
that their standing was blocked by this court’s
decision in Carter v. Berger, 777 F.2d 1173 (7th
Cir. 1985). The court rejected that, finding that
the plaintiffs were entitled to sue if the state
itself could have brought such a suit, as a
result of the earlier version of section 5/20-
104. 1993 WL 147416 at *4. It did not explain why
it had concluded that the state citizen suit
provision or any other state law doctrine was
binding for purposes of the federal statute, and
it is entirely possible that no one raised this
point with the court.

  That question has now been squarely presented
to us in this appeal. The Brown defendants argue
first, that the question of RICO standing
presents an issue of federal law that does not
necessarily depend on the way in which a state
has allocated its citizen suit powers, and
second, that these plaintiffs do not have
standing under the governing RICO precedents.

  The Supreme Court has held on a number of
occasions that we are to evaluate the private
enforcement mechanisms provided in RICO in the
light of the antitrust statutes on which they
were based. See, e.g., Sedima, S.P.R.L. v. Imrex
Co., 473 U.S. 479, 489 (1985); Agency Holding
Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 150
(1987); Holmes v. Securities Investor Protection
Corp., 503 U.S. 258, 267-70 (1992). So we shall
do, and the first lesson we take from the
antitrust precedents is that the question of
standing for RICO purposes is indeed a federal
one that must be resolved by reference to federal
law. This is precisely the approach we took in
Carter v. Berger, supra, although we too did not
explain our rationale at that time. District
Judge Stanley Roszkowski, in contrast, did write
on the subject in O’Donnell v. Kusper, 602 F.
Supp. 619 (N.D. Ill. 1985), and we find his
reasoning persuasive:

  The mere fact that Illinois courts would
recognize the plaintiff’s standing to bring such
an action, however, does not mean that he has
standing to bring a federal action arising from
the same occurrence. The plaintiff’s standing to
assert a federally created right is not
controlled by state law. As one commentator has
noted, "[i]f a challenged state act indeed
violates federal law, no reason has yet been
found to rest federal standing determinations on
the disparate allocations of power that underlie
fifty different governmental structures." Wright
& Miller, Federal Practice and Procedure, sec.
3531.10 (1984), p. 653.

602 F. Supp. at 622-23 (emphasis in original). We
also draw support for this conclusion from the
Supreme Court’s holdings in Agency Holding that
a federal statute of limitations had to govern
RICO actions, see 483 U.S. at 150, and in Holmes,
503 U.S. at 267-68, where the Court used a
federal standard for the causation requirements
of sec. 1964(c) (the RICO private action
provision) and relied heavily on the antitrust
standing decision in Associated General
Contractors, Inc. v. Carpenters, 459 U.S. 519
(1983).

  That clears the way for us to decide whether,
as a matter of federal law, a taxpayer derivative
suit or citizen suit of this kind is permissible,
or if on the other hand a taxpayer’s interests
are too remote to support RICO standing. In a
somewhat different context, we held in Carter
that for purposes of sec. 1964(c) "the directly
injured party should receive a complete recovery,
no matter what; an indirectly injured party
should look to the recovery of the directly
injured party, not to the wrongdoer, for relief."
777 F.2d at 1176. There, the directly injured
party was the county, whose tax collections had
been less than they should have been because of
the acts of bribery and mail fraud at issue;
those plaintiffs claimed that they too were
injured because their tax assessments were too
high, as a result of the depressed levels of
other people’s taxes. The plaintiffs’ injuries in
our case are, if anything, even more remote: they
have suffered only in the general way that all
taxpayers suffer when the state is victimized by
dishonesty. We naturally accept the proposition
that the State of Illinois itself was directly
injured by the mis-direction of its funds into
non-interest bearing accounts and the pockets of
miscreants. But that simply suggests that the
State is the proper party to be suing, not the
plaintiffs.

  In response, the plaintiffs argue that they are
in exactly the same position they would enjoy if
the State had directly assigned them the job of
recovering its losses, by virtue of the citizens
action law or the public trust doctrine. That
would surely be true, if we were talking about a
suit under state law, in state court. But we do
not see how a state law permitting citizen or
taxpayer standing, that requires nothing more in
the way of a personal stake on the part of the
plaintiff, can override longstanding prudential
limitations on the bringing of actions in federal
court. General taxpayer actions are not
permitted. See Flast v. Cohen, 392 U.S. 83, 104-
06 (1968). Antitrust standing is limited in
several ways: the plaintiffs must not be too
remote from the injury, and so normally only
consumers or competitors have standing, not
unions, shareholders, or others further removed;
only direct purchasers are entitled to sue; and
"antitrust injury" must be present. See
Goldwasser v. Ameritech Corp., No. 98-1439, 2000
WL 1022365 at *8 (7th Cir. July 25, 2000)
(reviewing various aspects of antitrust
standing). If the state law were controlling,
then we would have the same lack of uniformity
about who was entitled to sue for violations of
sec. 1962(c) that the Supreme Court found
unacceptable for statute of limitations purposes
in Agency Holding.

  The State of Illinois is entitled to vindicate
its own rights under RICO in federal court.
Compare Hawaii v. Standard Oil Co., 405 U.S. 251,
262-64 (1972) (state may not sue under the
antitrust laws for generalized harm to its
economy, but it may sue for treble damages for
injuries it suffers in its proprietary capacity).
If the State wishes to reinforce that power with
citizens suits, either to expand the resources
devoted to catching disloyal actors or to guard
against internal corruption, it is certainly free
to do so. We hold only that its decisions do not
affect the scope of standing for purposes of
RICO.

III

  This decision is enough to dispose of the case,
and so we have no need to reach the district
court’s other grounds for dismissing the action:
the question whether the loan from Brown to
Cosentino was a single unified transaction, and
thus not a "pattern" of racketeering activity for
purposes of sec. 1962(c), and the question
whether the plaintiffs presented enough evidence
on causation to survive summary judgment. A few
comments are nonetheless in order. First, we
agree with the district court that the
plaintiffs’ late effort to save their case by an
additional claim that they had shown a violation
of RICO sec. 1962(d) (the conspiracy section) was
not enough to change the result. Whether or not
the pleadings asserted a sec. 1962(d) claim
(which would need to be assessed on the substance
of the pleadings, not on whether the citation
appeared), we see no evidence that the Brown
defendants agreed to participate in crimes
constituting a pattern of racketeering activity
or to join a criminal enterprise. See American
Automotive Accessories, Inc. v. Fishman, 175 F.3d
534, 544 (7th Cir. 1999). Second, with respect to
causation we note that the Brown defendants
allegedly served as a conduit for the loan to
Cosentino after the injuries to the State had
already occurred. Those injuries, from the
State’s perspective, included some $3,133 in lost
interest, and the deprivation of the honest
services of a state official; the State had no
interest otherwise in the monies changing hands
among Cosmopolitan, Brown, and Cosentino. If the
loan was the alleged racketeering activity, and
it did not cause Cosentino to place the state
funds in Cosmopolitan’s hands, we agree with the
district court that plaintiffs would not be able
to prove causation in any event. Finally, we have
no desire to engage in the scholastic debate over
the number of transactions this loan represented:
one, two (the loan plus the restructuring), five
(the loan plus the four new notes), or something
else. We leave such mental exercises to another
day and another case where they will determine
the outcome.

 The judgment of the district court is Affirmed.