Posted by Solomon N. Klein, Litigation Partner
*Update: On Jan. 21, 2021,Judge Cogan granted plaintiff’s motion for reconsideration of the order denying default judgment and vacated the order dismissing the action. The Judge found that “unlike its motion for a default judgment, plaintiff for the first time draws the connections between the broadly pleaded allegations in the complaint and the detailed, but difficult to decipher, supporting exhibits.”
Judge Brian M. Cogan recently dismissed an insurer’s civil RICO action against dozens of named and unnamed defendants alleging a fraudulent no-fault insurance enterprise. The plaintiff moved for default judgment – only to have the Court analyze the complaint and dismiss the action for failing to properly plead the RICO elements. Am. Trans. Ins. Co. v. Bilyk, 19 civ 5171 (E.D.N.Y. Dec. 14, 2020) (BMC).
A practice note: Litigators are oft-tempted to employ civil RICO claims when representing plaintiffs – and the seeming benefits can be quite enticing. The victimized clients are grateful to mark the defendants as “racketeers” – not to mention the prospect of treble damages. The RICO statute also open the doors to the federal courts and can perhaps solve pesky jurisdictional problems for out-of-state defendants. Yet, civil RICO cases often fail to gain traction and plaintiffs face significant difficulties in properly pleading the necessary elements of RICO actions. As a result, the pleadings face judicial scrutiny and skepticism and the dismissal of the RICO claim, when it’s the only basis for jurisdiction, can result in the entire case being dismissed.
In the case before Judge Cogan, the Court noted that a defendant’s default is not an automatic judgment for the plaintiff. Although, by defaulting, a defendant essentially admits to the well-pleaded allegations, it still “remains the plaintiff’s burden to demonstrate that those uncontroverted allegations, without more, establish the defendant’s liability on each asserted cause of action. [citations omitted].”
The Court initially observed that “When a complaint is 186 pages long, plus more than 300 pages of annexed exhibits, and contains 58 claims for relief, that is a red flag . . . and even in cases that require compliance with Rule 9(b), as does this one, particularity is not the same as verbosity.”
The Court then held that the complaint failed to properly plead the elements of a RICO claim:
The Second Circuit has established that “a plaintiff must plead ‘the existence of seven constituent elements: (1) that the defendant (2) through the commission of two or more acts (3) constituting a ‘pattern’ (4) of ‘racketeering activity’ (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an ‘enterprise’ (7) the activities of which affect interstate or foreign commerce.’” RxUSA Wholesale, Inc. v. Alcon Labs., Inc., 661 F. Supp. 2d 218, 244 (E.D.N.Y. 2009), aff’d, 391 F. App’x 59 (2d Cir. 2010) (quoting Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983)).
The complaint does not establish a combined enterprise, but instead alleges fifteen different enterprises that have no apparent connection to each other. “An enterprise is ‘a group of persons associated together for a common purpose of engaging in a course of conduct,’ as demonstrated ‘by evidence of an ongoing organization . . . [and] by evidence that the various associates function as a continuing unit.” Gov’t Employees Ins. Co. v. Scheer, No. 13-CV-04039, 2014 WL 4966150, at *5 (E.D.N.Y. Aug. 18, 2014), report and recommendation adopted, 2014 WL 4966137 (E.D.N.Y. Sept. 30, 2014) (quoting First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir. 2004)). “[M]erely stringing together a list of defendants and labeling them an enterprise is insufficient to state a RICO claim.” Cedar Swamp Holdings, Inc. v. Zaman, 487 F. Supp. 2d 444, 450 (S.D.N.Y. 2007). “An enterprise . . . must be more than the sum of the participants in a series of independent frauds.” Id. at 452; see Moll v. U.S. Life Title Ins. Co., 654 F. Supp. 1012, 1031-32 (S.D.N.Y. 1987) (dismissing complaint containing allegations that members of enterprise provided settlement services to purchasers of real estate and received kickbacks, because it failed to “specify how these members joined together as a group to achieve these purposes,” and lacked “factual allegations regarding the continuity of structure or personnel of this group”). “Courts have repeatedly held that a simple fraud scheme is insufficient to state a RICO violation.” Ho Myung Moolson Co., Ltd. v. Manitou Mineral Water, Inc., 665 F.Supp.2d 239, 261 (S.D.N.Y. 2009)
As described above, plaintiff alleges a RICO enterprise comprised of over a dozen separate groups of fraudsters, each of which has relationships among its respective members, but which do not appear to have any relationships between them. Although the complaint claims that some defendants and unnamed coconspirators worked in Teams of two to four to submit some number of fraudulent claims, there is no allegation that any of these Teams worked with another, shared the proceeds from the fraudulent claims, or even had any knowledge of each other. There is no suggestion that these Teams shared any type of common purpose. Instead, plaintiff asks me to assume the Teams worked together simply because the contours of the disparate schemes were similar and they used some of the same, nonexistent billing codes. But any such assumption relies too much on speculation and is insufficient to demonstrate a single combined enterprise.
Even within each separate alleged RICO scheme, plaintiff has failed to demonstrate defendants’ liability. A default does not excuse defects in the plaintiff’s pleading. See Said, 2010 WL 1265186, at *2.
. . .
Here, the complaint contains no particulars. In attempting to rope together dozens of bad actors who may have filed fraudulent claims pursuant to a number of different schemes, the complaint fails to provide any specificity as to the fraudulent methods used by any defendant.
. . .
The bloated complaint is entirely generic, failing to sufficiently describe the actions of any defendant. See In re Blech Sec. Litig., 928 F. Supp. at 1294 (dismissing for failure to plead fraud with particularity where “[t]hroughout, the [c]omplaint never delineates the wrongdoing of any of the particular . . . [d]efendants.”). It is plaintiff’s burden to demonstrate that its allegations establish defendants’ liability under RICO, see Gunawan, 897 F. Supp. 2d at 83, and it has failed to do so.
Once the RICO claims were dismissed, the Court declined to exercise supplemental jurisdiction over the remaining state claims and dismissed the action.
Posted by Solomon N. Klein, Litigation Partner