Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

DEGUELLE v. CAMILLI (December 15, 2011)

Michael DeGuelle worked for S. C. Johnson & Son, Inc. in its tax department. In the early 2000s, he came to believe that the company was submitting false income tax reports to the IRS. He discussed his concerns with several others within the company to no avail. He complained to Human Resources that Global Tax Counsel Wenzel was creating a hostile work environment by instructing him to engage in what he considered illegal activity. Wenzel criticized DeGuelle for taking his complaints outside the department, even becoming physically aggressive, and gave DeGuelle a negative performance review. The tension between the two continued for months. Finally, DeGuelle indicated that he was going to file a whistleblower complaint with the Department of Labor. The company offered to pay some of his attorney's fees if he would sign a release and confidentiality agreement. He declined and filed the complaint, attaching financial documents and internal communications. He continued to press the issue internally at the company as well. He provided company counsel with a lengthy memorandum detailing his concerns. The company offered one-year severance if he resigned and signed a confidentiality agreement. DeGuelle refused. A few weeks later, the company began an investigation of DeGuelle relating to the documents he disclosed in his complaint. He was eventually terminated for disclosing company documents. The company filed suit in state court for breach of contract and for the recovery of documents. DeGuelle filed suit in federal court, alleging RICO violations, breach of contract, wrongful termination, and defamation. Judge Stadtmueller (E.D. Wis.) dismissed the RICO claims with prejudice and declined to exercise jurisdiction over the state law claims. DeGuelle appeals.

In their opinion, Seventh Circuit Judges Flaum, Kanne, and Hamilton reversed and remanded. The Court addressed the RICO pleading requirements. Under §1964(c), DeGuelle must allege that he was injured by reason of a § 1962 violation. DeGuelle alleged violations of subsections 1962(c) and 1962(d). Subsection (c) requires a "pattern of racketeering activity" allegation. Northwestern Bell requires that the alleged predicate acts of racketeering be related to each other and that there is a continuing threat. Finally, subsection (c) requires "but for" causation between the racketeering activity and the plaintiff's injury. Since DeGuelle’s alleged injuries were related only to the retaliation and since the retaliatory attacks were not themselves a pattern of racketeering activity, the Court concluded that the retaliatory activity must be related to the tax fraud activity. The Court found the district court erred in concluding that they were unrelated because they involved different people, motives, and victims. The retaliatory conduct was inherently related to the scheme that DeGuelle exposed. Specifically relying on the Sarbanes-Oxley whistleblower provisions, the Court stated that courts must examine the facts in each case to determine if the retaliation is related to the underlying wrongdoing. The Court concluded, on the record before it, that DeGuelle satisfied the Northwestern Bell test for his subsection (c) allegation. DeGuelle also alleged a subsection (d) claim. Under subsection (d), DeGuelle must allege an agreement to commit at least two predicate acts. The Court concluded that DeGuelle adequately alleged an agreement among the tax department defendants. Again, since DeGuelle's alleged injury was related only to the retaliatory conduct, the Court inquired whether DeGuelle adequately alleged an agreement between the participants in the tax fraud and the participants in the retaliation. It concluded that the complaint adequately, although sparsely, alleged that the retaliatory actors aided the tax fraud actors in concealing their conduct and thus were part of the original tax fraud conspiracy.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

RENNELL v. ROWE (MARCH 25, 2011)

Richard Rennell and Randall Rowe created a joint venture in 2004 to own and manage manufactured-housing communities in several states. Rowe provided the financing and Rennell managed the properties. After a few years, notwithstanding excellent results from Rennell, Rowe hired someone to manage the properties and no longer needed Rennell. In 2007, Rowe told Rennell that he was terminating the joint venture. He offered Rennell approximately $300,000 for his share in the venture, notwithstanding that they had recently valued it at $3.5 million. Rowe also demanded an answer within 24 hours and threatened to make the termination public if Rennell did not accept the offer. Rennell did sign the termination agreement and promised not to sue Rowe. Notwithstanding that promise, Rennell filed suit alleging two different theories of RICO liability. Judge Pallmeyer (N.D. Ill.) dismissed the complaint. Rennell appeals.

In their opinion, Judges Posner, Kanne, and Wood affirmed. The Court began its analysis with RICO's definition of "racketeering activity" as "any act or threat involving . . . extortion." Thus, the critical question for the Court was whether the complaint’s allegations described an act of extortion. The Court’s own jurisprudence establishes that extortion exists when one uses violence or threat of violence to obtain property, even if one has a claim to the property. In addition, if one has no claim to property, the use of fear, even economic fear, may amount to extortion. Economic pressure is not extortion if one has a claim to the property issue. Turning first to the question whether Rowe had a claim on Rennell's joint venture interest, the Court examined the contractual relationship between the parties. The joint venture agreement itself could be terminated only for cause -- but one of the "causes" was the termination of any one of the property management agreements. The property management agreements could be terminated without cause. Therefore, Rowe was contractually entitled to terminate a property management agreement and then terminate, for cause, the joint venture agreement. Rennell argued that even if the termination was proper, Rowe's conduct was improper because of the small payment offered, the narrow time frame for acceptance, and the threat to make the termination public. The Court rejected this argument. Rowe was a hard bargainer. But Rennell was free to reject the offer and sue for what he thought he was owed. And the threat to make the termination public, even if it would negatively impact Rennell’s business, is not extortion. The Court ended by noting that Rennell could still pursue his state law claims in state court.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On April 13, 2011, the Court granted petitions for rehearing en banc with respect to the Tax Injunction Act issue. On July 8, the en banc Court, in a 5-3 vote, disagreed with the panel and affirmed the district court’s conclusion that the Tax Injunction Act applied.

EMPRESS CASINO JOLIET CORP. v. BLAGOJEVICH (March 2, 2011)

In 2006, Illinois Governor Rod Blagojevich signed into law the 2006 Horse Racing Act. The Act required the state's four highest grossing casinos to pay 3% of their adjusted gross revenue into a fund. The fund was kept separate from other state funds and was not available to any state agency or program. Instead, the money in the fund was paid to five horseracing tracks in Illinois. The purpose of the Act, according to legislative findings, was to assist the horseracing industry, which had suffered financially after casinos were allowed to operate in Illinois. The casinos challenged the Act in state court. The Illinois Supreme Court upheld the Act against state and federal constitutional challenges. A few months later, the United States brought political corruption charges against Blagojevich. In an affidavit attached to the criminal complaint, an FBI agent described conversations in which Blagojevich discussed receiving money in return for his support of the Horse Racing Act. The casinos returned to state court and sought post-judgment relief based on this information. The state court denied relief, concluding that the legislature's motive in passing the Act was irrelevant to its constitutionality. The casinos then brought suit in federal court against Blagojevich, the racetracks, and the owner of two of the racetracks. The complaint alleged a RICO conspiracy and sought a constructive trust to prevent the racetracks from receiving any money. Blagojevich moved to dismiss on legislative immunity grounds. One or more of the defendants also moved to dismiss the RICO claim on res judicata and for failure to state a claim and moved to dismiss the constructive trust claim on several grounds: that it was barred by the Tax Injunction Act, that it was premature, that there was no unjust enrichment, res judicata, and Colorado River abstention. Judge Kennelly (N.D. Ill.) rejected the legislative immunity claim and denied the motions to dismiss the RICO claim, but dismissed the constructive trust claim on the grounds that the Tax Injunction Act eliminated jurisdiction. Blagojevich appealed the legislative immunity ruling and the casinos appealed the constructive trust ruling.

In their opinion, Judges Bauer, Posner (dissenting), and Sykes reversed both with respect to the legislative immunity claim and the constructive trust claim. With respect to legislative immunity, the Court cited Tenney for the proposition that state officials are absolutely immune from damages suits arising from their legislative activity. Although the Supreme Court has never applying that principle to a governor, the Court saw no reason that it would not apply and noted that other circuits have so extended the principle. The principle applies even when the legislative activity is illegal or improper. The Court rejected the casinos’ argument that Blagojevich’s immunity should be decided in reference to state law, relying on the Supreme Court's decision in Lake Country Estates. The Court also expressed its view that the Illinois Supreme Court's decision in Jorgensen (where it rejected Blagojevich’s claim of legislative immunity) would not control even if state law did apply. Jorgensen was not a damages case, but was a constitutional attack on Blagojevich's judicial pay raise veto. Therefore, Blagojevich is immune and the RICO claim should be dismissed. The Court moved on to consider the Tax Injunction Act argument. That Act prohibits a federal court from interfering with the collection of state taxes where there is a sufficient remedy in state court. The only real issue presented under the Act is whether the 3% casino surcharge is a tax. The Court concluded that it was not because it had none of the normal indicia of a tax. The Act never referred to as a tax, the only targets of the Act are four casinos, the only beneficiaries of the Act are five racetracks, the money is segregated from all state funds, the money is not available to any state program or agency, the Act has a regulatory purpose (protecting the racetracks from competition), and the Act was enacted under the state's police power, not its taxing power. Therefore, the Tax Injunction Act does not apply and the constructive trust claim can be considered. Given the Court's treatment of the Tax Injunction Act issue, it proceeded to consider the defendants’ alternate grounds to dismiss the constructive trust claim. First, it rejected the argument that the Illinois Supreme Court's decision on the casinos’ constitutional challenge had any preclusive effect on the case. Both the causes of action and the parties were different. Next, it rejected the argument that the state court’s denial of post-judgment relief had preclusive effect on the case. In fact, the state court denied relief because the allegations of corruption were unrelated to the constitutional challenge before the court. The Court rejected the collateral estoppel and Colorado River abstention arguments for much the same reason -- a constitutionality challenge is fundamentally different from a RICO claim. Finally, the Court rejected defendants' argument that their actions were not the proximate cause of the casinos' injuries.

Judge Posner dissented both with respect to the legislative immunity issue and the Tax injunction Act issue. With respect to immunity, he agreed that the general rule is that a state official is entitled to legislative immunity. But if Illinois grants its officials less than complete immunity, federal common law should do the same. There is no federal interest served in affording a state official more protection in federal court that he would enjoy in a state court. Because it was not clear in Jorgensen whether the Illinois Supreme Court would grant legislative immunity in a civil damages case, judge Posner would certify the question to that court. With respect to the Tax Injunction Act issue, Judge Posner agreed that the only question was whether the surcharge was a tax -- and he concluded that it was. He agreed that not every state receipt of money was a tax, but he distinguished between taxes and fees by asking whether the charge was based on a reasonable estimate of the cost of some service provided. The charge imposed on the casinos here is not a fee for a service but a subsidy for the racetracks. Therefore, it is a tax and the Tax Injunction Act applies.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

ANDERSON v. AON CORP. (July 26, 2010)

Robert Anderson sold his California insurance brokerage firm to Aon Corporation in 1997. He received approximately 95,000 shares of Aon stock when it was trading around $69 per share. Within five years, its share price had fallen to approximately $14. Anderson brought suit in state court in California, his state of residency, and alleged only violations of California securities law. He alleged that the fall in share price was due to the company’s mismanagement, that the mismanagement was fraudulently concealed until 2002, and that he would have sold the shares earlier absent the concealment. Aon removed on diversity grounds. Anderson shortly thereafter dismissed without prejudice, anticipating that the federal court was going to transfer the case to Illinois under § 1404(a). He refiled, again in California state court, and added two California citizen defendants (to prevent diversity). Curiously, this time he included a federal claim (RICO) in his complaint. Aon removed on federal question grounds and also asserted that the additional defendants were fraudulently joined. Anderson dismissed his federal claim and asked that the case be remanded. Instead, the California district court transferred the case to Illinois. Judge Manning (N.D. Ill.) applied Illinois law and dismissed the complaint for failure to state a claim. Anderson appeals.

In their opinion, Chief Judge Easterbrook and Judges Williams and Tinder reversed and remanded. The Court first addressed its appellate jurisdiction, since one of Anderson's arguments was that the California federal court should have remanded to state court, instead of transferring, once he dismissed his RICO claim. The Court recognized that some circuits have held that appellate review in cases such as this is split between the transferor court's circuit and the transferee court's circuit -- but it concluded otherwise. A § 1404(a) transfer is not separately reviewable. The only review comes after a final decision when all rulings of the Illinois court (even if to apply law of the case) are reviewed. On the merits of the transfer decision, the Court concluded that the lower court acted appropriately. There was jurisdiction when the suit was filed because of the federal claim and there was supplemental jurisdiction over the state law claim under § 1367(a). Once the federal claim was dismissed, the district court had discretion to either remand or to assert its supplemental jurisdiction over the state court claims until resolution. The Court cited Andersen's legal maneuvering as one reason the court prudently kept (and transferred) the case. On the substantive merits of the claim, however, the Court found error. The transfer of the case should not affect the applicable law. Here, the court should have applied the California choice-of-law rules to determine which state's substantive law applied. The California choice-of-law rule has three parts: first, it asks whether the different states' laws are different; second (if they are different), it examines each states' interest to decide whether a true conflict exists; and third (if there is a true conflict), it applies the law of the state whose interests would be most impaired by the adoption of the other state's law. The Court noted that the substantive law at issue here was the viability of a "holder action." A holder action is a private action for damages by an investor who claims that he continued to hold the stock, when he would otherwise have sold, because of the deceit of the defendant. The Supreme Court, in Blue Chip Stamps, concluded that holder actions are not viable under federal securities laws. However, they are viable under California securities laws. The Illinois Supreme Court has not spoken, although Illinois generally follows federal law in this area. The Court therefore concluded that there was a true conflict under the choice of law rules in the California. It also concluded that the third prong of the test favored California in that California has affirmatively accepted the viability of a holder action and Illinois has not spoken on the issue. Anderson should thus be allowed to proceed with the action. The Court concluded by noting a number of significant obstacles in Anderson's path but left them to be addressed, in the first instance, by the district court.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

JAY E. HAYDEN FOUNDATION v. FIRST NEIGHBOR BANK (June 22, 2010)

Jay Hayden died in 1985. His will established the Jay E. Hayden Foundation and named Robert Cochonour as executor. Between 1985 and 2001, Cochonour allegedly embezzled from both the Foundation and from accounts belonging to Hayden's mother and his mother’s friend. Cochonour apparently had the cooperation of First Neighbor Bank in carrying out his misdeeds. By 2002, Cochonour admitted that he had stolen some money and had resigned his state court judgeship. The trustees of the Foundation were aware that it no longer had any assets but there was no record of what happened. For several years, Cochonour and the bank took steps to prevent the plaintiffs from learning additional facts. Eventually, in May of 2008, plaintiffs brought a RICO action against the bank, two law firms, and several associated individuals. Judge Reagan (S.D. Ill.) granted defendants' motion to dismiss on statute of limitations grounds. Plaintiffs appeal.

In their opinion, Judges Posner, Rovner, and Tinder affirmed. The statute of limitations for a RICO claim, stated the Court, is four years and begins to run when the plaintiffs discover or should have discovered the injury and the injurer. Here, the Court concluded that the plaintiffs had significant suspicions by mid-2003 but may not have had sufficient information to bring suit until 2005. If the defendant engages in obstructive conduct, however, that prevents a plaintiff from obtaining sufficient information to file its complaint, the defendant is equitably stopped from pleading the statute of limitations defense for the period of obstructive behavior. Plaintiffs allege that that is what happened here. The Court recognized a split of authority regarding the impact of equitable estoppel on limitations period. Some courts have allowed an extension of a limitations period for the full amount of the delay while others have held that a plaintiff must commence the action as soon as possible after the obstruction ends. The Court decided to apply the latter rule -- particularly in a RICO case where the Supreme Court has emphasized the importance of prompt action. In applying the "as soon as possible" rule, the Court stated that plaintiffs had enough information in 2005 to complete their investigation and file suit long before the three years they actually used. Notwithstanding the Court's conclusion that the action was barred by the statute of limitations, it also addressed the defendants' alternative argument that the complaint failed to state a RICO cause of action. The Court concluded that it did not since it did not allege that the defendants used an enterprise (i.e., their conspiracy) to engage in a pattern of racketeering activity.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

CARR v. TILLERY (January 12, 2010)

Rex Carr was a lawyer in southern Illinois. He and his partners had several agreements concerning the allocation of fees earned by the firm. The agreements continued in effect after the dissolution of the firm in 2003. Significant disputes arose, and a host of lawsuits were filed, with respect to those fees. A Memorandum of Understanding (MOU) was agreed to in 2004. It was meant to control the distribution of all fees, past and future, among the partners. Notwithstanding an agreement to dismiss all pending cases, Carr actually amended a counterclaim in one of the pending actions to assert that he had been fraudulently induced to enter into the MOU. The claim was eventually dismissed and the dismissal was affirmed. While the appeal was pending, Carr brought four separate suits in state court, then brought this federal case, and then voluntarily dismissed the state cases. He brought the federal case under RICO, repeating many of the allegations of the earlier suits, including the fraudulent inducement claim. The district court dismissed the suit for failure to state a claim. Carr appeals. The defendants cross-appeal from the court's denial of their motion for sanctions.

In their opinion, Judges Posner, Ripple, and Wood affirmed in part and vacated and remanded in part. On the merits, the Court disagreed with the court below that all the claims were barred by the doctrine of res judicata. The complaint contains at least one claim that postdates the earlier dismissal. The Court held that the claims were barred, however, by Illinois' "one refiling" rule. Under that rule, a plaintiff who voluntarily dismisses a complaint may start a new action within one year or the remaining period of limitations. Illinois courts have held the rule to mean that a plaintiff may commence only one new action after a voluntary dismissal. Here, Carr filed four lawsuits in Illinois before he filed the federal lawsuit. He dismissed all of the state court suits soon after he filed a federal suit. Although each of the state court suits was based on a different theory of liability or sought different relief, they all arose from the same events. That is true even for the claim postdating the earlier dismissal, a claim that the defendants violated the MOU. The Court next considered whether the RICO claim, on which federal jurisdiction was based, was so weak so as to not support jurisdiction. Such a conclusion would lead the Court to dismiss for lack of jurisdiction rather than on the merits. Although the Court termed the claimant a "complete nonstarter," since it was so on the basis of an affirmative defense, the Court concluded that a dismissal on the merits with prejudice was more appropriate. On the cross-appeal, the Court found the denial of sanctions erroneous. Although the defendants based their motion on § 1927, which does not apply to misconduct prior to the filing of the federal complaint, the Court saw no reason why the district court could not invoke its inherent, common law power to punish attorney misconduct. The filing of multiple lawsuits, including the present frivolous one, was ground enough for the Court to direct the district court to assess a proper sanction and consider enjoining Carr from conducting further related litigation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

STROITELSTVO BULGARIA LIMITED v. BULGARIAN-AMERICAN ENTERPRISE FUND (December 14, 2009)

Stroitelstvo Bulgaria Limited ("Limited") is a Bulgarian construction company. In 2005, it borrowed almost €2 million from the Bulgarian-American Credit Bank ("Bank") for a construction project. After a few months, the Bank claimed that Limited breached the loan agreement. It terminated its payments under the borrowing and asserted a right to recover almost €1 million, although less than €400,000 had been disbursed. According to Limited, the allegations of a breach were simply a pretext to put pressure on Limited to pay more for its borrowing. When the bank got a judgment in Bulgaria for almost €1 million and froze Limited’s assets, Limited agreed to compromise the claim for less than the judgment but more than they owed. They then sued Bank and its U.S. parent in U.S. court, alleging violations of RICO and the Bulgarian Obligations and Contracts Act as well as contract and tort claims. The court granted a motion to dismiss on forum non conveniens grounds. Limited appeals.

In their opinion, Judges Manion, Sykes and Tinder affirmed. In order to dismiss on forum non conveniens grounds, a court must find that there is an alternate forum that is both available and adequate. The principal issue on the appeal was whether the available Bulgarian forum was “adequate.” An adequate forum is one that provides some fair avenue for redress – not necessarily as complete or comprehensive as the U.S. forum. The Court noted that there was expert testimony regarding corruption in the Bulgarian court system. However, particularly given Bulgaria’s entry into the European Union with its requirement of a stable legal system, the Court concluded that the anecdotal evidence of corruption did not establish inadequacy. The Court also conceded that Limited would not have available the same claims in Bulgaria – particularly would have no RICO claim. It was undisputed that a breach of contract claim would lie against the Bank, and that was the heart of the complaint. The Court concluded that was enough potential for redress to meet the adequacy standard. Finally, the Court concluded that the higher filing fee in Bulgaria did not rule out the dismissal. Having concluded that the Bulgarian forum was available and adequate, the Court addressed the balancing factors. The Court found no abuse of discretion. In fact, it found the private and public interests strongly favored Bulgaria.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

RAO v. BP PRODUCTS NORTH AMERICA (December 9, 2009)

Salik Rao operated as a BP gasoline service station dealer in the Chicago area. For 10 years beginning in the early 1990s, Rao gave over $100,000 worth of cash and gifts to a BP sales manager. In return, the sales manager performed many favors for Rao, to his great benefit. In 2003, Rao reported this improper activity to BP. However, he characterized it as extortion on the part of the sales manager. BP begin an investigation which ultimately led to the termination of the sales manager in November of 2003. BP continued its investigation, seeking to confirm the extortion. Although Rao promised to cooperate, he never met with BP after November of 2003 and affirmatively withdrew his pledge of cooperation in June of 2004. BP notified Rao in October 2004 that it was terminating its franchise relationship with him because of his improper activity. Rao brought suit under the Petroleum Marketing Practices Act ("PMPA"), as well as RICO, fraud, breach of contract and extortion. The court dismissed the counts based on RICO, fraud and breach of contract and granted summary judgment on the PMPA claim. Rao appeals.

In their opinion, Judges Bauer, Flaum and Williams affirmed. The principal issue on appeal was whether BP's notice of termination was sufficient under the PMPA. The PMPA, which protects service station franchisees, allows early termination of franchise agreements in certain circumstances, which Rao does not contest here. The PMPA requires the franchisor to give a notice of such early termination within 120 days of when it "first acquired actual or constructive knowledge" of the reason for the termination. Here, it is uncontested that BP knew of the improper conduct well over 120 days before providing termination notice. The Court focused, however, on what BP knew when and what BP did. From the fall of 2003 through the middle of 2004, Rao continued to insist that he was a victim of the sales manager's extortion. The sales manager, at the same time, insisted that the gifts were given voluntarily in exchange for his favors. The Court concluded that the statute did not require BP to give notice while it was still investigating the allegations. It was not until Rao ceased his cooperation that the clock started. BP's notification was sent within 120 days of that date and was therefore proper. The Court affirmed the rest of the lower court's judgment as well.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

THE CANCER FOUNDATION v. CERBERUS CAPITAL MANAGEMENT (March 19, 2009)

In the late 1990s, Martin Lapides and his corporate empire were suffering. He obtained a $23 million line of credit from the Gordon Brothers Group and others. Soon after, Gordon Brothers, working with Lapides' chief financial officer, began to wrest control of one of the corporations away from Lapides. Once Gordon Brothers and the others obtained control of the corporation, they placed it in bankruptcy. The bankruptcy triggered a whole host of financial troubles for Lapides. One of the victims of these troubles was the Cancer Foundation, when one of Lapides’ companies was unable to fulfill an $80 million pledge. Several individual investors in Lapides’ corporations filed suit and obtained a $7 million judgment against Lapides personally. The Cancer Foundation, Lapides and others who suffered harm from the conduct of Gordon Brothers filed suit in 2007 under the Racketeer Influenced and Corrupt Organization Act (RICO). The district court dismissed the complaint on the grounds that it was barred by the statute of limitations. Plaintiffs appeal.

In their opinion, Judges Ripple, Manion and Evans affirmed. The Court noted the "generous" four year statute of limitations for a RICO cause of action runs from the time when a plaintiff discovers the harm. A plaintiff does not have to know that the harm is actionable to begin the limitations period. The Court agreed with the district court in holding that the complaint was barred. The conduct complained of was complete an entire decade before the suit began. The Court rejected plaintiff’s argument that the statute did not begin to run until an article in Forbes alerted them to the alleged conspiracy. The plaintiffs were clearly aware of their injury, even if they were not aware of all of its particular elements, well outside of the limitations period.

• Email This
• Print
• Comments
• Trackbacks
• Share Link