Civil RICO and Code Enforcement: Understanding the Law and Avoiding Litigation

Civil RICO And Code Enforcement: Understanding The Law And Avoiding Litigation

A Presentation for the Illinois Municipal League

September 17, 2015

Everette M. Hill, Jr. and Allen Wall

KLEIN, THORPE AND JENKINS, LTD.

20 North Wacker Drive, Suite 1660

Chicago, Illinois 60606

(312) 984-6400

I.A Scenario To Consider

In the middle of your downtown sits a bar that has been run by the same crotchety old grandmother for 50 years. Throughout those fifty years, she has managed to alienate every sitting village board, village manager and code enforcement officer. Every other inspection, she either refuses the inspectors entry or throws them out once they come in and start writing down all of the code violations. The village has cited her numerous times for sanitary, property maintenance and liquor service related issues. The village has, from time to time, threatened to close her down, but has never done so. She caters to a biker crowd that gets very noisy on weekends and the police frequently are there in response to complaints. It has been rumored for years that drugs are sold on the premises, but despite significant surveillance attempts, no transaction has ever been observed. The owner buys her bar supplies from out of state and often has out of state bands as entertainment.

About a year ago, one of the village trustees bought the property next door and has opened a high end sushi bar. The trustee claims that many people patronize the sushi bar once, but he has few repeat customers. He blames the conditions and biker patronage at the tavern. In addition, the mayor lives in a condominium complex adjacent to the tavern and is often awakened by the Harleys being revved up at closing time. The trustee and mayor complain to the village manager and the director of community development about the code violations at the tavern. After meeting with the mayor and the trustee and knowing how bad the conditions are, the director tells his staff to begin the process of issuing citations. This process involves the writing of warning letters, which always go out by regular and certified mail. For the first time in the history of the tavern, the letters are very detailed with respect to the violations. They are form letters which threaten maximum fines and potential closing of the business. The next time the health code enforcement officers come to inspect the tavern, they are refused entry.

Upon hearing that entry has been refused, the village manager contacts the village attorney who advises that an administrative warrant should be obtained. In short order, the health officer swears out an affidavit, the village attorney goes into court and the warrant is served. Because the violations cut across every discipline, each member of the code enforcement team shows up for the inspection. In addition, because 15 years ago the owner had pulled a gun on one of her unruly patrons, the inspectors are accompanied by two police officers.

Two weeks later a federal lawsuit, naming the village, the mayor, the sushi trustee, the village manager, the community development director, the code official who wrote the warning letters and village attorney, as defendants. The suit sounds in civil RICO, claiming an orchestrated scheme to put the tavern out of business and demands treble damages as allowed by statute. The suit is sent to your insurance carrier whose attorney advises that the suit will undoubtedly survive summary judgment and go to a jury.

II.The RICO Statute

The statute governing civil RICO is 18 U.S.C. §1962. Two provisions of this statute are most significant for civil RICO actions. These are:

A.18 U.S.C. § 1962 (c) that reads:

“It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.”

B.18 U.S.C. § 1962 (d) that reads:

“It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.”

III.The Elements Of A Civil RICO Cause Of Action

1. To establish a civil RICO cause of action, a plaintiff must prove the following:

(1)conduct;

(2)of an enterprise;

(3)through a pattern;

(4)of racketeering activity.

1. Definitions of key terms in a civil RICO cause of action

(1)“Enterprise” means an ongoing structure of persons associated through time, joined in a purpose, and organized in a manner amenable to hierarchical consensual decision making. (Jennings v. Emry, 910 F.2d 1434, 1440 (7th Cir. 1990).

(2)“Pattern of racketeering activity” means at least two predicate acts committed within a ten-year period. (Midwest Grinding Company, Inc. v. Spitz, 976 F.2d 1016, 1019 (7th Cir. 1992).

(3)“Predicate acts” are acts indictable under a specified list of criminal laws, including mail fraud, wire fraud and extortion. (Sedima v. ImrexCompany, Inc., 473 U.S. 479, 497, 105 S.Ct. 3275 (1985). “Predicate acts” also may include violations of select state criminal statutes.

1. To find a public official or employee liable for a civil RICO violation, a plaintiff must show that the official or employee was associated with an enterprise and took some part in directing the affairs of the enterprise.
   (Richmond v. Nationwide Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995).

IV.Understanding Civil RICO: Looking More Closely At The Elements Of the Cause Of Action

A.A Closer Look At the “Conduct” Element -- DeFlaco v. Bernas, 244 F.3d 286 (2nd Cir. 2001)

1. Defendants claim insufficient evidence for a jury to find they conducted affairs of the Town of Delaware, New York.

1. The Court found sufficient evidence to satisfy the “conduct” element.

1. Supervisor served as a member of Town Board and the Town Legislature.

b.Supervisor used his authority within the Town of Delaware to negatively affect plaintiff’s development project.

1. The Court determined that two defendants who had no role in the operation or management of the Town of Delaware still participated in the “conduct” of the affairs of the municipality.

1. The defendants exerted control over the municipality.

1. Evidence showed that one defendant threatened plaintiff with adverse official action of the Town of Delaware that later occurred.

c.Evidence showed that an agreement could be reached on an important phase of plaintiff’s real estate development once a defendant who was not a town official approved of plaintiff’s project plans.

B.A Closer Look at the “Enterprise” Element -- Newkirk v. Village of Steger, 2004 WL 2191589 (N.D.Ill.)

1. Defendants filed a motion to dismiss civil RICO on the grounds that plaintiffs failed to adequately allege that a RICO enterprise existed.

1. The enterprise must have a structure and goals separate from the predicate acts committed to advance the purpose of the enterprise.

1. A RICO defendant must be separate and distinct from the enterprise because liability depends on showing that the defendants conducted or participated in the conduct of the enterprise’s affairs, through a pattern of racketeering activity.

1. The Court granted the motion to dismiss noting that nothing in the plaintiff’s allegations demonstrated the existence of a command structure separate and apart from the defendants themselves.

1. Plaintiffs’ allegations described what the defendants purportedly did, but the allegations failed to say anything about the structure of the enterprise and provided no sign of an organizational structure.

C.A Closer Look at the “Pattern” Element --Pelfresne v. Stephens, 35 F.Supp.2d 1064 (N.D.Ill. 1999)

1. Motions to dismiss filed including one in which the defendant argued plaintiffs failed to allege a pattern of racketeering activity – specifically the mailings at issue did not satisfy the continuity prong because the acts occurred too close together in time.

1. Two types of continuity for purposes of the RICO “pattern” of racketeering activity.

1. “Closed ended” continuity requires a showing of duration.

b. “Open-ended” continuity can be alleged with a scheme that has no natural ending point, thus suggesting that the conduct threatens to continue into the future.

1. The Court denies the motion to dismiss finding the allegations set forth open-ended continuity to establish a pattern of racketeering activity.

1. Scheme began in 1979 and threatened to continue into the future.

b.Plaintiff asserted at least two mailings that furthered the scheme.

D.A Closer Look at the “Racketeering Activities” Element -- LaFlamboy v. Lander, 587 F.Supp.2d 914 (N.D.Ill. 2008)

1. Plaintiff alleged that the village defendants engaged in thirty separate racketeering acts designed to force him out of his business so the village could take control.

1. The alleged racketeering activities included mail fraud, official misconduct and various other crimes.

1. Defendants filed for summary judgment arguing the complaint should be dismissed because the plaintiff could not prove sufficient predicate acts to establish a pattern of racketeering activity.

1. Official Misconduct

1. Twenty-one purported predicate acts involved misconduct in violation of the Illinois Official Misconduct statute, 720 ILCS 5/33-3.

1. 720 ILCS 5/33-3(d) – “solicits or knowingly accepts for the performance of any act a fee or reward which he knows is not authorized by law” constitutes “bribery” and can be a RICO predicate act.

1. Plaintiff allegations provided sufficient evident for a genuine issue of material fact as to whether the village mayor accepted a kickback in the form of proceeds from a concert at plaintiff’s facility in exchange for the village ignoring code violations and allowing the concert to take place.

1. Mail Fraud

1. Nine purported mail fraud racketeering acts against the village defendants.

1. Court found: (1) mailing need not contain false or misleading information nor cause loss on its own (2) mailings only need to be in furtherance of a scheme to constitute mail fraud.

1. Plaintiff offered evidence that at least two mailings were made in support of a scheme to defraud plaintiff

1. Mails used to further a scheme to purchase plaintiff’s indoor golfing facility for the mayor’s or the village’s benefit.

1. Letters mailed by village defendants that created a question of fact as to whether they engaged in a scheme to deprive plaintiff of his property in his indoor golfing facility with inconsistent and/or unfair application and enforcement of village ordinances.

1. Obstruction of Justice

Obstruction of justice in violation of federal criminal statutes can constitute RICO predicate acts – not demonstrated in this case.

IV.Legal Points To Consider Regarding Civil RICO

1. Wire Fraud

1.In civil RICO, wire fraud must involve interstate communication.

2.The courts have concluded that when all parties reside in the same state, it is not reasonable to infer that communications between the parties involved interstate use of the wires.

3.Intrastate communications using the telephone or facsimile transmissions are not RICO predicate acts.

B.Immunity And Public Officials

1.Under the doctrine of legislative immunity, public officials are entitled to absolute immunity only when they operate in the sphere of “legitimate activity” that includes:

1. Core legislative acts such as introducing, debating and voting on legislation.

1. Activities that could not give rise to liability without inquiry into legislative acts and the motives behind them.

1. Activities essential to facilitating or preventing the core legislative process.

2.When public officials engage in administrative acts rather than legislative acts, legislative immunity is not available as a defense against a civil RICO cause of action.

C.Public Officials, Financial Gain and Civil RICO

1.The United States Supreme Court, in Wilkie v. Robbins, 551 U.S. 537, 127 S.Ct. 2588 (2007), indicated that actionable extortion by public officials involves corruption, the sale of favors for private gain or taking a bribe.

2.Federal courts have determined that “fraud” for civil RICO purposes requires “the specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.” See, e.g., Richards v. Combined Insurance Company of America, 55 F.3d 247, 252 7th Cir. 1995).

3.Absent a showing that public officials used positions of authority and influence to promote their personal and political interests or to cause economic harm to a specific individual(s), civil RICO allegations should be found empty, meritless and unsuccessful.

1