Court Opinion

ID: 4253436
Source: CourtListenerOpinion
Date Created: 2018-03-09 22:00:24.794637+00
Date Added: 2024-06-11T14:44:15.398174
License: Public Domain

PUBLISHED

                      UNITED STATES COURT OF APPEALS
                          FOR THE FOURTH CIRCUIT

                                      No. 17-1106

SLAY’S RESTORATION, LLC,

            Plaintiff - Appellant,

v.

WRIGHT NATIONAL FLOOD INSURANCE COMPANY; COLONIAL
CLAIMS CORPORATION; KLSM CONSULTING GROUP, INC., d/b/a JD
Consulting & Appraisal Group; CIS GROUP LLC; SAMUEL WOODARD;
JEFFREY NICHOLL; JEFFREY P. KAISER; MICHAEL CARMELIA,

            Defendants - Appellees.

Appeal from the United States District Court for the Eastern District of Virginia, at
Newport News. Raymond A. Jackson, District Judge. (4:15-cv-00140-RAJ-LRL)

Argued: December 7, 2017                                    Decided: March 9, 2018

Before NIEMEYER and AGEE, Circuit Judges, and Paula XINIS, United States District
Judge for the District of Maryland, sitting by designation.

Affirmed by published opinion. Judge Niemeyer wrote the opinion, in which Judge Agee
and Judge Xinis joined.

ARGUED: Joseph H. Langerak, IV, JACKSON KELLY PLLC, Evansville, Indiana, for
Appellant. Theodore Ira Brenner, FREEBORN & PETERS, LLP, Richmond, Virginia,
for Appellees Wright National Flood Insurance Company, Colonial Claims Corporation,
and Jeffrey Nicholl. ON BRIEF: James D. Johnson, JACKSON KELLY PLLC,
Evansville, Indiana; John S. Wilson, WILSON & MCINTYRE PLLC, Norfolk, Virginia,
for Appellant. Alexander S. de Witt, FREEBORN & PETERS LLP, Richmond, Virginia,
for Appellees Wright National Flood Insurance Company, Colonial Claims Corporation,
and Jeffrey Nicholl. Ramsay C. McCullough, Kristina H. Vaquera, JACKSON LEWIS
PC, Norfolk, Virginia, for Appellees KLSM Consulting Group, Inc., CIS Group, Inc.,
Samuel Woodard, and Jeffrey Kaiser.

                                        2
NIEMEYER, Circuit Judge:

       In this appeal, we hold that a subcontractor hired by a property owner’s contractor

to repair flood damage to the owner’s property was not injured in its business or property

by reason of a pattern of racketeering allegedly carried out by the property owner’s

insurance company and its independent consultants to reduce the amount paid on the

property owner’s insurance claims for reimbursement of the repair costs. Accordingly,

the injury alleged by the property owner’s subcontractor — in this case, Slay’s

Restoration, LLC — was not proximately caused by conduct of the insurance company,

and Slay’s Restoration therefore failed to state a plausible claim under the Racketeer

Influenced and Corrupt Organizations Act (“RICO”) against the insurance company and

its consultants upon which relief could be granted. See 18 U.S.C. §§ 1962(c), 1964(c).

       When an apartment complex owned by City Line Associates, LP, was damaged by

flooding, City Line hired First Atlantic Restoration, Inc., to make repairs. First Atlantic,

in turn, hired the plaintiff, Slay’s Restoration, as a subcontractor to perform some of the

work. Using documentation provided by Slay’s Restoration describing the work it did,

City Line submitted several insurance claims for payment of its costs of repair to its

insurance company, Wright National Flood Insurance Company. To adjust the claim,

Wright Insurance hired Colonial Claims Corporation, and Colonial Claims, in turn, hired

two consulting firms to provide professional assessments of the repair work done. Based

on the consulting firms’ assessments, Wright Insurance offered to pay its insured, City

Line, less than one-half of the amount City Line requested.

                                             3
          Slay’s Restoration commenced this action against Wright Insurance and its

consultants contending that they fraudulently conspired to reduce City Line’s claim, in

violation of RICO, thereby injuring City Line’s ability to pay Slay’s Restoration fully for

its work. On the defendants’ motions, the district court dismissed Slay’s Restoration’s

complaint, concluding (1) that Slay’s Restoration did not plausibly allege that its injury

was proximately caused by the defendants’ alleged violation of RICO, as required by the

statute, and, alternatively, (2) that Slay’s Restoration’s claim was precluded by

restrictions contained in City Line’s insurance policy issued under the National Flood

Insurance Program.

          Concluding that Slay’s Restoration has not and cannot, in the circumstances of this

case, adequately allege proximate causation as required for a civil RICO claim, we

affirm.

                                               I

          As a result of heavy rainfall in Newport News, Virginia, in September 2014, a

200-unit apartment complex owned by City Line was damaged by flooding. City Line

hired First Atlantic to effect repairs, and First Atlantic hired Slay’s Restoration to

perform “drying services.” Upon completion of the work, Slay’s Restoration submitted

documentation of its work to First Atlantic and City Line for use by City Line in its

presentation of claims to Wright Insurance, its insurance company. Wright Insurance

provided flood insurance to City Line under the National Flood Insurance Program

administered by the Federal Emergency Management Agency (“FEMA”). Under that

                                               4
program, Wright Insurance is responsible for adjusting claims made under the policy, but

FEMA ultimately pays the loss. See Woodson v. Allstate Ins. Co., 855 F.3d 628, 631 (4th

Cir. 2017). City Line submitted 18 claims to Wright Insurance for over $1.2 million in

the aggregate to reimburse it for the costs of repairs to 18 apartment buildings.

       To adjust the claims, Wright Insurance hired Colonial Claims, a claims-adjusting

firm, and Colonial Claims hired two consulting firms to evaluate the work done in

repairing the flood damage, including that done by Slay’s Restoration. These firms

submitted reports concluding that First Atlantic and Slay’s Restoration had not adhered to

applicable industry standards in repairing the apartments. After receiving these reports,

Wright Insurance offered to pay City Line a total amount of roughly $530,000 in

satisfaction of its 18 claims.

       Slay’s Restoration commenced this action, alleging in some detail that the

reduction of City Line’s claims resulted from the two consulting firms’ wrongful

assessment of its work and their fraudulent representations that the work was not

performed in accordance with applicable standards.          Contending that the conduct

amounted to violations of 18 U.S.C. §§ 1341 and 1343, which prohibit the use of the

mails or wire to obtain money by fraud or false pretenses, Slay’s Restoration alleged that

Wright Insurance, Colonial Claims, and the two consulting firms participated in a

“fraudulent scheme” to create “false reports [about the repair work done] to deny policy

benefits to insureds and payments to contractors,” in violation of RICO, 18 U.S.C.

§ 1962(c). According to Slay’s Restoration, the substantial reduction of City Line’s

claims as a result of this scheme prevented First Atlantic and ultimately Slay’s

                                             5
Restoration from receiving full payment for their work. It claimed that it suffered a loss

exceeding $900,000 and sought treble damages, as provided by 18 U.S.C. § 1964(c).

      The defendants filed motions to dismiss under Federal Rule of Civil Procedure

12(b)(6), contending, among other things, (1) that Slay’s Restoration lacked “standing” to

bring its civil RICO claim because Slay’s Restoration could not show that the defendants

were the proximate cause of its injury, given that the parties had no contractual

relationship with each other that would require the defendants to disburse FEMA funds

directly to Slay’s Restoration; and (2) that Slay’s Restoration was, in any event,

foreclosed from pursuing its claim because City Line’s standard form insurance policy, as

fixed by FEMA, required that any dispute from the handling of a claim be governed

exclusively by FEMA regulations, the National Flood Insurance Act, and federal

common law.

      Agreeing with both arguments, the district court granted the defendants’ motions

and dismissed Slay’s Restoration’s complaint. On the issue of causation, the court noted

that Slay’s Restoration was “a subcontractor of First Atlantic, who [was] a contractor of

City Line, who ha[d] an insurance policy with Wright [Insurance], who employed the

[defendants],” concluding that, “on these facts, any financial injury [that Slay’s

Restoration] ha[d] endured was proximately caused by First Atlantic,” not by any of the

defendants’ actions. In addition, the district court determined that Slay’s Restoration’s

claim was precluded by the provisions regulating the National Flood Insurance Program

and the terms of the standard form insurance policy issued by Wright Insurance as

required under that program.

                                            6
       From the district court’s judgment dated January 3, 2017, Slay’s Restoration filed

this appeal.

                                             II

       The question presented is whether Slay’s Restoration sufficiently alleged that its

injury was proximately caused by the alleged racketeering — i.e., that it was “injured in

[its] business or property by reason of a violation of [RICO].” 18 U.S.C. § 1964(c).

Slay’s Restoration insists that it suffered an injury “by reason of” the defendants’ conduct

and contends that the district court’s reliance on a lack of privity between it and Wright

Insurance “place[d] unwarranted limitations on the RICO proximate cause requirement.”

According to Slay’s Restoration, the defendants — particularly the consulting firms —

engaged in a scheme to commit mail and wire fraud “primarily directed at Slay’s

[Restoration],” causing it to “accept[] [a $535,152] reduction off its billing.” (Emphasis

added).

       Section 1964(c) provides in relevant part:

       Any person injured in his business or property by reason of a violation of
       section 1962 of this chapter may sue therefor in any appropriate United
       States district court and shall recover threefold the damages he sustains and
       the cost of the suit, including a reasonable attorney’s fee.

18 U.S.C. § 1964(c) (emphasis added). While this language could be construed as simply

requiring “but for” causation of a plaintiff’s injury and thereby allowing “all factually

injured plaintiffs to recover,” it is clear from context that Congress did not intend “such

an expansive reading.” Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 265–66 (1992).

                                             7
       In Holmes, the Court observed that because Congress had modeled the § 1964(c)

language after similar language in § 4 of the Clayton Act, 1 it undoubtedly intended that

§ 1964(c) have the same “judicial gloss” as had been read into § 4. The Court therefore

held that, as is the case under the Clayton Act, § 1964(c) requires a showing of

“proximate caus[ation],” meaning “some direct relation between the injury asserted and

the injurious conduct alleged.” Id. at 268; see also Blue Shield of Va. v. McCready, 457
U.S. 465, 477 (1982) (noting in relation to the antitrust laws that “[i]t is reasonable to

assume that Congress did not intend to allow every person tangentially affected by an

antitrust violation to maintain an action to recover threefold damages for the injury to his

business or property”).

       Since Holmes was decided, the Court has reiterated and reinforced its application

of the proximate cause requirement to civil RICO claims. Thus, in Anza v. Ideal Steel

Supply Corp., 547 U.S. 451 (2006), the Court stated that “[w]hen a court evaluates a

RICO claim for proximate causation, the central question it must ask is whether the

alleged violation led directly to the plaintiff’s injuries.” Id. at 461 (emphasis added).

And in Hemi Group, LLC v. City of New York, 559 U.S. 1 (2010), the Court clarified

further the application of that requirement, noting that it turns on the directness of the

resultant harm, not the foreseeability of that harm. While the Court recognized that

       1
          The relevant Clayton Act language reads: “[A]ny person who shall be injured in
his business or property by reason of anything forbidden in the antitrust laws may sue
therefor . . . and shall recover threefold the damages by him sustained, and the cost of
suit, including a reasonable attorney’s fee.” 15 U.S.C. § 15 (emphasis added).

                                             8
foreseeability is an established tenet of proximate causation at common law, the Court

stated that it is not a tenet that applies in the RICO context. Id. at 12. Thus, a court

facing a RICO claim should not focus on whether the harm to the RICO plaintiff was a

foreseeable result of the defendant’s conduct or even whether it was “the intended

consequence[] of [that] behavior,” but rather on “the directness of the relationship

between the conduct and the harm.” Id. (second emphasis added) (quoting Anza, 547
U.S. at 470 (Thomas, J., concurring in part and dissenting in part)).

       In sum, rather than incorporating the concept of foreseeability or traceability of an

injury to conduct, RICO causation requires a proximity of statutory violation and injury

such that the injury is sequentially the direct result — generally at “the first step” in the

chain of causation. Assoc. Gen. Contractors of Cal. v. Cal. State Council of Carpenters,

459 U.S. 519, 534 (1983). Therefore, regardless of how foreseeable a plaintiff’s claimed

injury might be or even what motive underlaid the conduct that caused the harm, the

injury for which a plaintiff may seek damages under RICO cannot be contingent on or

derivative of harm suffered by a different party.

       The Holmes Court provided several rationales for this direct-relationship

requirement. First, when an injury is not directly caused by the violation, it becomes

more difficult for courts to determine what portion of the plaintiff’s damages is

attributable to the violation, as opposed to other, independent factors. Holmes, 503 U.S.

at 269. Second, without a direct-relationship requirement, to avoid the risk of multiple

recoveries, courts would need to engage in the complicated task of apportioning damages

among plaintiffs along the causal chain of the defendant’s violation. Id. And third,

                                             9
directly injured plaintiffs, who presumably will also have a strong incentive to sue, can be

sufficiently relied upon to vindicate the regulatory aims of the statute without opening the

cause of action to indirect plaintiffs claiming speculative or convoluted injuries. Id. at

269–70.

       In this case, Slay’s Restoration has not alleged facts showing that its injury was

the direct result of the defendants’ conduct. Rather, it alleged that two consulting firms

hired by Colonial Claims, who in turn was hired by Wright Insurance, colluded to defame

Slay’s Restoration’s work with false and fraudulent reports, resulting in Wright

Insurance’s reduction of the amount it was willing to pay City Line on its claims of $1.2

million. To be sure, Slay’s Restoration did contend that this reduction prevented City

Line from fully compensating First Atlantic for the work it performed, which in turn

prevented First Atlantic from fully compensating Slay’s Restoration. But even though

Slay’s Restoration alleged that the defendants’ fraudulent conduct was the cause of its

injury, it did so by describing a chain of causation that extends significantly beyond “the

first step,” proceeding from the consulting firms’ fraudulent conduct, through Colonial

Claims and Wright Insurance to City Line, then to First Atlantic, and ultimately to Slay’s

Restoration. Because Slay’s Restoration’s claimed injury was not the direct result of the

defendant’s fraudulent conduct, it was not proximately caused by that conduct, as

required by § 1964(c).

       Slay’s Restoration insists that this focus on the chain of causation is inapt given

the circumstances here because it was the expected recipient of insurance funds disbursed

by Wright Insurance under the policy, and therefore it had been injured by the defendants.

                                            10
But this argument is nothing more than a claim that Slay’s Restoration’s injury

foreseeably resulted from the defendants’ conduct, not that it directly resulted from that

conduct.   As we noted, the Supreme Court in Hemi Group explicitly rejected a

foreseeability standard for civil RICO claims. See Hemi Group, 559 U.S. at 12. Indeed,

as Hemi Group explained, even if Slay’s Restoration could demonstrate that its injury

was one of the “intended consequences of the defendant[s’] unlawful behavior,” it would

still have to demonstrate that the injury was also the direct consequence. Id. (internal

quotation marks and citation omitted); see also Assoc. Gen. Contractors, 459 U.S. at 537

(noting that while “an allegation of improper motive” may support a plaintiff’s claim for

damages under the Clayton Act, it “is not a panacea that will enable any complaint to

withstand a motion to dismiss”).

       Slay’s Restoration also seeks to bypass the direct-relationship requirement by

demonstrating that its rationale, as given in Holmes, see 503 U.S. at 269–70, is not

implicated here. It asserts that the district court in this case would face no difficulty in

ascertaining the amount of damages owed to Slay’s Restoration due to Wright

Insurance’s adjustment of City Line’s claims because those claims were based entirely on

invoices provided by Slay’s Restoration and First Atlantic. This argument, however,

grossly oversimplifies the process by which Slay’s Restoration could receive any part of

the insurance proceeds. In the circumstances of this case, both FEMA and Wright

Insurance might have reasons for reducing the claims independent of the consulting

firms’ assessments, including complex regulations of the National Flood Insurance

Program. The funds would then pass through City Line to First Atlantic, both of whom

                                            11
might also have independent defenses to raise against a party seeking payment. In light

of these potential intervening causes, we cannot assume that if Wright Insurance

improperly or fraudulently evaluated the work that Slay’s Restoration performed, Slay’s

Restoration would therefore ultimately be entitled to the full amount of its claim against

First Atlantic for that work. Nor can we even assume that any failure by First Atlantic to

fully compensate Slay’s Restoration for its work would be entirely attributable to Wright

Insurance’s underpayment on City Line’s claim. 2 The dangers of these assumptions are

precisely what prompted the Supreme Court to adopt the proximate cause requirement.

       Finally, Slay’s Restoration urges that we nonetheless recognize a special exception

for the circumstances in this case. But that would require us to find some non-arbitrary

point at which to draw a line in the chain of causation. In creating such an exception, we

would, for example, have to determine conceptually whether a third or fourth level

subcontractor of an insured could bring a RICO claim against the insurance company or,

indeed, whether a supplier to one of those subcontractors could. Making exceptions to

the proximate cause requirement on a case-by-case basis, as Slay’s Restoration would

have us do, would force courts to contend with the very issues of causation and

apportionment that prompted the Supreme Court to adopt the direct-relationship

requirement in the first place. Cf. Kansas v. UtiliCorp United, Inc., 497 U.S. 199, 211

       2
          While Slay’s Restoration may have had a claim based on contract or other
grounds against First Atlantic or City Line, as parties with which it had a direct relation,
it asserted no such claim in this case.

                                            12
(1990) (refusing to recognize exceptions to the direct-relationship requirement for civil

antitrust claims that would require courts to address the complex issues the requirement

was intended to avert).

       In sum, Slay’s Restoration is not the proper plaintiff to bring a civil RICO action

against the defendants in this case because the injury claimed by Slay’s Restoration was

not the direct result of, and therefore not proximately caused by, the defendants’ alleged

illegal conduct.

                                            III

       In view of our ruling that Slay’s Restoration cannot allege the requisite proximate

causation, we do not reach the question of whether Slay’s Restoration’s claim is also

precluded by the terms of Wright Insurance’s standard form insurance policy. The

judgment of the district court is accordingly

                                                                            AFFIRMED.

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