Court Opinion

ID: 4220670
Source: CourtListenerOpinion
Date Created: 2017-11-15 21:00:29.839372+00
Date Added: 2024-06-11T14:15:29.411437
License: Public Domain

NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT
                               ________________

                                      No. 16-3664
                                   ________________

        YUCAIPA AMERICAN ALLIANCE FUND I, LP, a Delaware Limited
      Partnership; YUCAIPA AMERICAN ALLIANCE PARALLEL FUND I, LP,
                         a Delaware Limited Partnership,
                                                 Appellants

                                             v.

      RICHARD A. EHRLICH; STEPHEN H. DECKOFF; LESLIE A. MEIER;
   JEFFREY A. SCHAFFER; BDCM OPPORTUNITY FUND II, LP, A Delaware
Limited Partnership; BLACK DIAMOND CLO 2005-1 LTD, a Cayman Islands Limited
         Liability Company; SPECTRUM INVESTMENT PARTNERS, LP,
                         a Delaware Limited Partnership
                               ________________

                     On Appeal from the United States District Court
                                for the District of Delaware
                               (D. Del. No. 1-15-cv-00373)
                       District Judge: Honorable Sue L. Robinson
                                    ________________

                    Submitted Pursuant to Third Circuit LAR 34.1(a)
                                    April 4, 2017

              Before: CHAGARES, SCIRICA, and FISHER, Circuit Judges

                               (Filed: November 15, 2017)

                                   ________________

                                       OPINION*
                                   ________________

*
 This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
SCIRICA, Circuit Judge

       This case involves events surrounding the bankruptcies of Allied Systems

Holdings, Inc. and a dispute between hedge funds who hold portions of Allied’s first lien

debt. Plaintiffs are two hedge funds managed by Yucaipa Companies, LLC, (collectively

“Yucaipa”). Defendants are hedge funds managed by Black Diamond and Spectrum

Investment Partners, and their employees (collectively “BD/S”). Yucaipa alleges BD/S

engaged in a conspiracy to induce Yucaipa to take a detrimental position in Allied’s

bankruptcy, resulting in damages in the form of equitable subrogation of Yucaipa’s first

lien debt holdings by the bankruptcy court and resulting legal fees. Yucaipa asserts

claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962,

as well as state law claims for fraud and tortious interference with business relations.

       The District Court granted BD/S’s motion to dismiss the RICO claims and

declined to exercise supplemental jurisdiction over the remaining state law claims, and

Yucaipa appealed. We will affirm.

                                             I.

                                             A.

       The origins of this case lie in the first bankruptcy of Allied in 2007 in the United

States Bankruptcy Court for the District of Delaware and a tangled web of resulting

litigation. After the bankruptcy, Yucaipa became the majority shareholder of Allied under

the plan of reorganization and controlled the board of directors. To finance the

reorganization and emergence from bankruptcy, in May 2007, Allied borrowed $265

million of first lien debt from numerous lenders pursuant to a credit agreement. BD/S

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were among the lenders, and held a minority stake in the first lien debt.

       The terms of the credit agreement are essential to the present dispute. Under its

terms, a lender or lenders holding 50% or more of the first lien debt can act as “requisite

lenders” who have the authority to declare events of default, demand immediate payment

by Allied of the balance of the loan, or commence foreclosure. As Allied’s majority

equity holder, Yucaipa was expressly forbidden by the terms of the credit agreement from

acting as a requisite lender.

       In 2008, Allied defaulted on the first lien debt and stopped making interest

payments. Subsequently, Allied agreed to an amendment of the credit agreement, which

gave Yucaipa the right to purchase first lien debt, but under certain restrictions, which

continued to prevent Yucaipa from serving as the requisite lenders.

       In February 2009, ComVest Investment Partners III, L.P., which is not a party to

this suit, became the requisite lenders. Yucaipa negotiated directly with ComVest to

acquire the majority of Allied’s first lien debt. In addition, Yucaipa, as majority equity

holder, caused Allied to enter a purported amendment to the credit agreement, which

would have eliminated the restrictions on Yucaipa’s ownership of Allied’s first lien debt

and allowed Yucaipa to become the requisite lenders. On the same day, Yucaipa declared

itself the requisite lenders under the terms of the original credit agreement.

       However, the proposed amendment was not approved by unanimous consent of

the first lien debt lenders, as required by the original credit agreement. In January 2012,

BD/S filed suit against Yucaipa in New York state court and successfully obtained a

declaratory judgment that Yucaipa was not the requisite lenders because the purported

                                              3
amendment to the credit agreement was void.

       While the New York action was pending, in May 2012, BD/S filed involuntary

petitions for bankruptcy against Allied in the United States Bankruptcy Court for the

District of Delaware. In adversarial proceedings in the bankruptcy court, both Yucaipa

and BD/S claimed to be the requisite lenders under the credit agreement. The bankruptcy

court determined BD/S were the requisite lenders and the District Court affirmed this

determination.

       The bankruptcy court supervised an auction of Allied’s remaining assets. Jack

Cooper Holdings Corporation, which is not a party to this suit, purchased the bulk of

Allied’s assets. As the requisite lenders, BD/S submitted a credit bid to purchase the

remainder of Allied’s assets, which was approved by the bankruptcy court.

       After the auction, Yucaipa filed suit in Delaware state court against BD/S and

other Allied lenders to challenge the allocation of the remainder of Allied’s assets. The

Delaware court dismissed some of Yucaipa’s claims on collateral estoppel grounds based

on the prior decisions of the bankruptcy court. The remainder of the claims were stayed

pending resolution of the bankruptcy.

       Meanwhile, in the bankruptcy action, BD/S, as requisite lenders, sponsored a plan

of reorganization, which was approved by the bankruptcy court. The plan included

prosecution of claims against Yucaipa and its principals for breach of contract and breach

of fiduciary duty, and sought equitable subordination of Yucaipa’s first lien debt

holdings. The bankruptcy action remains pending.

                                             4
                                             B.

       After the reorganization plan was approved, Yucaipa filed this action in the

District Court for the District of Delaware, alleging violation of the Racketeer Influenced

and Corrupt Organizations Act, 18 U.S.C. § 1962, conspiracy to violate RICO, and state

law claims for fraud and tortious interference with business relations. Yucaipa alleges

BD/S engaged in a scheme in which BD/S encouraged Yucaipa to purchase Allied’s first

lien debt from ComVest, then forced Allied into involuntary bankruptcy, in which BD/S

caused the bankruptcy court to equitably subordinate Yucaipa’s first lien debt holdings in

favor of BD/S’s minority stake in the first lien debt.

       Yucaipa alleges the scheme began as early as 2009, when a Spectrum employee

received an email from a third-party which stated “I thought you were going to check out

the ‘equitable subordination’ angle.” In addition, Yucaipa relies on an email from a

Spectrum employee to a Black Diamond employee, which explained that it “looks like

Yucaipa pushed the equity button here . . . you ready to roll.” Yucaipa alleges these

emails demonstrate a scheme, beginning in 2009, to file the involuntary petition for

bankruptcy and result in the equitable subordination of Yucaipa’s first lien debt.

       In furtherance of this plan, Yucaipa alleges BD/S encouraged Yucaipa to purchase

as much first lien debt as possible. Black Diamond’s founder and principal met with

Yucaipa’s officers in August 2009, and allegedly provided assurances BD/S would work

with Yucaipa after Yucaipa acquired ComVest’s first lien debt. Yucaipa also relies on an

email from February 2, 2011, in which a Black Diamond partner assured Yucaipa that

“[o]n Allied, the strategy you outlined seemed right and you have our support.”

                                              5
       In addition, Yucaipa alleges BD/S conspired to prevent Jack Cooper Holdings

from purchasing Allied outright prior to the second bankruptcy, and instead encouraged

the potential purchaser to wait to purchase Allied’s assets following the involuntary

bankruptcy. In support of this allegation, Yucaipa relies on emails between BD/S and

Jack Cooper Holdings in May and December 2011.

       Finally, Yucaipa alleges Black Diamond and Spectrum entered a cooperation

agreement in January 2012, prior to the involuntary bankruptcy petition, in which both

companies agreed to offer first refusal and participation rights to each other before

transferring any Allied debt. As part of this agreement, Black Diamond agreed to transfer

$4 million of its first lien debt to Spectrum for the same price Black Diamond originally

paid for the debt, representing a substantial discount from market value. Because

Spectrum already held enough of Allied’s debt prior to the transfer to qualify as a

petitioner for an involuntary bankruptcy, Yucaipa avers this transfer represented a bribe

to encourage Spectrum to support Black Diamond in the resulting bankruptcy.

       Yucaipa identifies the following predicate acts in support of its RICO claim:

    Yucaipa alleges the January 2012 cooperation agreement and $4 million transfer

       of first lien debt from Black Diamond to Spectrum constituted claims trading in

       relation to a bankruptcy proceeding in violation of 18 U.S.C. § 152(6).

    Yucaipa contends, in May 2012, BD/S lied in the petition for involuntary

       bankruptcy, as well as in various affidavits and declarations submitted to the

       bankruptcy court, and thus committed false oath and false declarations in relation

       to a bankruptcy proceeding in violation of 18 U.S.C. § 152(2)-(3).

                                             6
    Yucaipa avers that various BD/S statements to the bankruptcy court in May 2012

       constituted obstruction of justice in violation of 18 U.S.C. § 1503.

    Yucaipa claims several emails sent among BD/S employees constitute wire fraud

       in violation of 18 U.S.C. § 1343 because they “facilitated the solicitation of Allied

       debtholders to join the involuntary petition and . . . illegal claims trading.”

       Specifically, Yucaipa identifies emails from September 16, 2011, October 13,

       2011, and March 21, 2012.

    Yucaipa alleges Black Diamond’s transfer of claims to Spectrum in May 2012

       constituted mail fraud in violation of 18 U.S.C. § 1341.

As noted, Yucaipa seeks damages in the form of lost profits due to the involuntary

bankruptcy and equitable subrogation of its first lien debt holdings, as well as attorneys’

fees and costs associated with the resulting litigation in state and federal courts.

                                              C.

       BD/S filed a motion to dismiss in the District Court asserting, inter alia, (1)

Yucaipa’s RICO claims failed because (i) Yucaipa lacked RICO standing and (ii)

Yucaipa had not adequately pled a pattern of racketeering activity, (2) Yucaipa’s claims

were barred by the Noerr-Pennington doctrine, and (3) Yucaipa’s claims were barred by

covenants not to sue contained in the credit agreement.

       The District Court granted BD/S’s motion to dismiss the RICO claims, concluding

that Yucaipa lacked RICO standing and had failed to allege a pattern of racketeering

activity, and declined to exercise jurisdiction over the remaining state law tort claims. See

Yucaipa American Alliance Fund I v. Ehrlich, 204 F. Supp. 3d 765 (D. Del. 2016).

                                              7
Yucaipa appealed, and argues that the District Court erred in dismissing the RICO

claims.

                                              II.1

                                              A.

       Yucaipa argues the District Court erred in concluding it lacked RICO standing.

We disagree, and conclude the District Court correctly determined Yucaipa’s alleged

injuries were not a concrete financial loss and were contingent on the result of the

pending bankruptcy litigation.

       RICO provides a civil remedy for “any person injured in his business or property

by reason of a violation of” the substantive provisions of the statute. 18 U.S.C. § 1964(c).

“[T]he injury to business or property element of section 1964(c) can be satisfied by

allegations and proof of actual monetary loss, i.e., an out-of-pocket loss.” Maio v. Aetna,

Inc., 221 F.3d 472, 483 (3d Cir. 2000). An injury that “necessarily is contingent upon the

impact of events in the future which have not yet occurred” will not suffice. Id. at 495.

       Yucaipa alleges two types of injury in this case. First, the loss of value of its first

lien debt due to equitable subrogation in the bankruptcy proceeding, and second,

attorneys’ fees and expenses from the bankruptcy and related litigation. We agree with

the District Court that neither injury will suffice for purposes of conferring standing for

civil RICO liability under section 1964(c).

1
 The District Court had jurisdiction under 18 U.S.C. § 1964(c) and 28 U.S.C. §§ 1331
and 1367. We have jurisdiction over the District Court’s final order dismissing all claims
under 28 U.S.C. § 1291. We exercise plenary review of the District Court’s orders
granting a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). In re Ins.
Brokerage Antitrust Litig., 618 F.3d 300, 314 (3d Cir. 2010).

                                               8
         Yucaipa’s first alleged injury is plainly contingent on the outcome of the pending

bankruptcy proceeding, which is still ongoing. While BD/S has sought equitable

subrogation of Yucaipa’s holdings in the involuntary bankruptcy proceeding, the

bankruptcy court has yet to adjudicate the issue or approve a plan of reorganization.

Accordingly, Yucaipa’s injury is not yet concrete and is conditional on the decisions of

the bankruptcy court, as well as the result of any appeal.

         As to Yucaipa’s second alleged injury, we have not previously addressed whether

attorneys’ fees incurred as a result of an alleged RICO violation may alone constitute a

RCIO injury.2 We need not decide that question today, because the District Court

correctly concluded that the attorneys’ fees incurred as a result of the alleged RICO

violations are also contingent on the outcome of pending litigation in the bankruptcy

court.

         Yucaipa avers that our precedents require only the fact of injury to satisfy RICO

standing, and not that the amount of loss be quantifiable. We agree. See Maio, 221 F.3d

at 484. But in this case, as the District Court noted, Yucaipa may suffer no injury at all

depending on the outcome of the bankruptcy action. Yucaipa admits that it has sought

reimbursement in the bankruptcy proceeding for attorneys’ fees. In addition, Yucaipa

may prevail in its parallel litigation in the District of Delaware and may recover fees.

Thus, Yucaipa’s claims for attorneys’ fees are contingent on the outcome of all of the

pending litigation and do not establish RICO standing.

2
 Other Courts of Appeals have recognized RICO claims for attorneys’ fees, at least
where the fees were incurred in defending against frivolous or fraudulent claims. See
Handeen v. Lemaire, 112 F.3d 1339, 1354 (8th Cir. 1997); Bankers Trust Co. v. Rhoades,
859 F.2d 1096, 1105 (2d Cir. 1988).

                                              9
                                               B.

       Yucaipa maintains the District Court erred in determining Yucaipa had failed to

allege a pattern of racketeering activity. We disagree, because the District Court correctly

concluded that Yucaipa failed to allege a closed-ended continuity of RICO activity.

       To allege a civil violation of RICO, plaintiff must demonstrate defendant engaged

in “a pattern of racketeering activity.” 18 U.S.C. § 1962(c). “[T]o prove a pattern of

racketeering activity a plaintiff . . . must show that the racketeering predicates . . . amount

to or pose a threat of continued criminal activity.” H.J. Inc. v. Northwestern Bell Tel. Co.,

492 U.S. 229, 239 (1989). “‘Continuity’ is both a closed- and open-ended concept,

referring either to a closed period of repeated conduct, or to past conduct that by its

nature projects into the future with a threat of repetition.” Id. at 241.

       Yucaipa has abandoned its claims of open-ended continuity and relies only on

allegations of a closed-ended continuity. “A party alleging a RICO violation may

demonstrate continuity over a closed period by proving a series of related predicates

extending over a substantial period of time. Predicate acts extending over a few weeks or

months and threatening no future criminal conduct do not satisfy this requirement . . . .”

Id. at 242. We have previously explained “because ‘duration is the sine qua non of

continuity’ in a closed-ended scheme, . . . twelve months [between RICO predicate acts]

is not a substantial period of time.” Hughes v. Consol-Pennsylvania Coal Co., 945 F.2d

594, 611 (3d Cir. 1991) (quoting Hindes v. Castle, 937 F.2d 868, 873 (3d Cir. 1991)).

       The District Court concluded Yucaipa had failed to plead a closed-ended

continuity by looking to the dates of the alleged predicate acts in the complaint. The

                                              10
earliest predicate act identified in the complaint was an email sent on September 16,

2011, and the last predicate acts alleged were statements in the involuntary bankruptcy

petition filed in May 2012. The District Court determined the alleged pattern of

racketeering activity lasted only nine months and thus did not satisfy the closed-ended

continuity requirement.

       Yucaipa contends the District Court erred in calculating the length of the pattern

of racketeering based on the first alleged predicate act, the email sent on September 16,

2011, which allegedly constituted wire fraud in violation of 18 U.S.C. § 1343. Instead,

Yucaipa argues the closed-ended continuity should be deemed to begin with the 2009

emails from BD/S to Yucaipa because this is when the “underlying scheme” began.

       Yucaipa relies on our decision in Tabas v. Tabas, in which we stated “in civil

RICO complaints based on predicate acts of mail fraud ‘the continuity test requires us to

look beyond the mailings and examine the underlying scheme or artifice.’” 47 F.3d 1280,

1294 (3d Cir. 1995) (quoting Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1414

(3d Cir. 1991)). In Tabas, we considered claims arising out of an alleged RICO

conspiracy by a partner in a real estate firm and his business associates to defraud the

estate of a deceased partner through mischaracterizing personal expenses as business

expenses and receiving compensation not authorized by the partnership agreement.

Tabas, 47 F.3d at 1282–85. The alleged predicate acts were instances of mail fraud, but

we explained “[e]ach time defendants misrepresented the business nature of an expense,

made a questionable charge, or received compensation to which they were not entitled,

they lessened the income available to the” plaintiffs. Id. at 1294. We concluded the RICO

                                             11
continuity included each of the fraudulent deductions from the assets of the partnership.

Id.

       Yucaipa asks us to extend the Tabas holding beyond fraudulent conduct to include

conduct which did not violate any RICO predicate statute, but that allegedly led to losses

due to subsequent RICO predicate acts. The activity prior to the alleged predicate acts

Yucaipa seeks to use to show RICO continuity are emails and statements made by BD/S

to Yucaipa in 2009, which encourage Yucaipa to acquire first lien debt from ComVest.

As Yucaipa acknowledges, BD/S’s actions in 2009 were not themselves RICO predicate

acts. Nor did they serve to advance the alleged goal of the RICO conspiracy—to

equitably subordinate Yucaipa’s first lien debt in an involuntary bankruptcy that had not

yet occurred. These discussions necessarily occurred before Yucaipa even held

significant amounts of first lien debt, and thus cannot have been part of a conspiracy to

equitably subordinate Yucaipa’s first lien debt in favor of BD/S. These discussions are

not comparable to the fraudulent actions of the defendants in Tabas, which caused direct

harm to the plaintiffs, and we decline to extend Tabas to these facts.3 Accordingly, we

agree with the District Court’s determination that Yucaipa failed to plead a closed-ended

continuity based on RICO predicate acts occurring over a nine-month period.

                                            III.

       For the foregoing reasons, we will affirm the judgment of the District Court.

3
  After dismissing the RICO claims, the District Court declined to exercise supplemental
jurisdiction over the state law tort claims. Yucaipa does not challenge this conclusion on
appeal and we will affirm the dismissal of these claims without prejudice.

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