RWB Services, LLC v. Hartford Computer ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-3222
RWB S ERVICES, LLC,
Plaintiff-Appellant,
v.
H ARTFORD C OMPUTER G ROUP, INC., ET AL.,
Defendants-Appellees.
____________
A ppeal from the U nited States District Court
for the Northern District of Illinois, Eastern Division.
N o. 07 C 1073— Ruben Castillo, Judge.
____________
A RGUED M AY 9, 2008—D ECIDED A UGUST 25, 2008
____________
Before F LAUM, K ANNE, and T INDER, Circuit Judges.
F LAUM, Circuit Judge. The plaintiff-appellant, RWB
Services, LLC, says that the defendants misappropriated
used cameras in which it had security interests and
then resold the cameras as new to Wal-Mart. In the
district court, the vessels for this allegation were a num-
ber of state-law claims and one civil count under the
Racketeer Influenced and Corrupt Organizations Act, 18
2 No. 07-3222
U.S.C. § 1964(c)—the latter of which forms the basis of this
appeal. Below, the defendants moved to dismiss the
RICO count under Rule 12(b)(1), arguing that the plaintiff
lacked the requisite standing and, as a result, the district
court did not have subject matter jurisdiction. The district
court agreed, dismissed the RICO claim, and remanded
the remaining state-law claims to the Circuit Court of
Cook County. This appeal resulted, and for the reasons
that follow, we reverse.
I. Background
The allegations in this case stem from a commercial
lending agreement originally entered into between RWB
Services and a now-defunct company called Old Argus
in 2003. The agreement was for the purchase and sale of
cameras. Under the terms of the agreement, Old Argus
would secure the sale of a number of cameras to a particu-
lar retailer, in this case Wal-Mart. After being notified of
the sale, RWB Services would purchase the needed number
of cameras from vendors on Old Argus’s behalf, and Old
Argus would then deliver the cameras to and receive
payment from Wal-Mart. The proceeds from these sales
would go into a bank account held by a special purpose
entity, WIP Marketing, Inc., created for purposes of the
lending arrangement. RWB Services would then
draw down Old Argus’s debt from this account. To
ensure that this would happen, RWB Services retained
a security interest in all of WIP Marketing’s assets in-
cluding, specifically, the purchased cameras.
No. 07-3222 3
With one minor hitch,1 the parties followed this process
the first time through, and on June 3, 2003, RWB Services
loaned Old Argus an additional $951,000 to purchase
another set of cameras. Unbeknownst to RWB Services,
however, storm clouds had gathered over Old Argus’s
general ledger, and shortly after agreeing to the second
round of financing, Old Argus entered into an assign-
ment for the benefit of creditors, with a company called
Rally Capital Services, LLC as the assignee. After allegedly
chasing off two other bidders, 2 Rally Capital eventually
sold all of Old Argus’s assets for approximately
$1.3 million to another defendant, Hartford Computer
Group, Inc. As part of the sale, Hartford agreed to collect
Old Argus’s existing receivables but was expressly pre-
cluded from obtaining any interest in the WIP Marketing
inventory or any of the cameras funded by RWB Services.
All moneys owed for the cameras were to go to RWB
Services, as were, importantly, any returned cameras.
1
Rather than go into the account set up by WIP Marketing, the
payment went into a BankOne account held by Old Argus. The
parties then agreed that these funds would go to RWB Services
to repay the loan.
2
RWB Services alleges that Hartford (and possibly Rally
Capital) engaged in a mock bid to justify turning away two
other bidders. Specifically, RWB Services says that two other
bidders offered to purchase Old Argus’s assets for $2.4 million.
Hartford then submitted a slightly higher bid for $2.5 million,
which Old Argus’s assignee told the two bidders it would
accept. At some point, Hartford allegedly withdrew this bid
and, without contacting the two rebuffed bidders, Rally Capital
eventually accepted a much lower bid for $1.3 million.
4 No. 07-3222
It is what followed that resulted in this case. RWB
Services alleges that Hartford and its manag-
ers—defendants Anthony Graffia Senior and Ju-
nior—cooked up a scheme to defraud Old Argus’s former
customers. For any number of reasons, retailers like Wal-
Mart will return cameras to their distributors; customers
may return unwanted but functioning cameras or there
could be something wrong with the camera itself. When
this happened under Old Argus’s watch, Old Argus
would give its customer a credit for any returned cameras,
which the customer could then draw from in making
future purchases. When Hartford took over Old Argus’s
assets, there were a number of returned cameras from Wal-
Mart that Old Argus still had in its possession. RWB
Services alleges that, rather than return these cameras to
RWB Services as required, Hartford instead repackaged
and then resold them to Wal-Mart as new. In addition,
it claims that Hartford both told Wal-Mart to pay
amounts owed for kept cameras directly to Hartford—
rather than to RWB Services—and took possession of
returned cameras from Wal-Mart—rather than send them
to RWB Services as promised. RWB Services claims that
Hartford sold 50,000 repackaged cameras as new.
Realizing that the faucet of payments for its loan had
dried, RWB Services demanded payment from Hartford, a
request that Hartford refused. RWB Services claims that
this scheme of repackaging cameras and selling them as
new continued apace through at least March 2005, involv-
ing both its cameras and those of others. That month,
Hartford transferred most of its assets to a new company,
Impero Electronics, which RWB Services alleges was a
No. 07-3222 5
shell for the Graffias. Impero allegedly continued on
with Hartford’s alleged scheme, repackaging different
brands of returned cameras as new.
RWB Services initially filed suit against Hartford,
Impero, Rally Capital Services, and the Graffias in 2004. In
January 2007, RWB Services filed its Fourth Amended
Verified Complaint, which added to the nine state-law
claims a new one alleging a RICO violation against the
Graffias, Hartford, and Impero. The defendants removed
the case to the Northern District of Illinois. And on
August 22, 2007, the district court granted the defendants’
motion to dismiss, reasoning that RWB Services had failed
to show standing to sue under RICO. The basis for its
jurisdiction was the federal RICO claim, and, after this
claim fell, the court relinquished supplemental jurisdic-
tion over the remaining state claims. This appeal followed.
II. Discussion
The civil RICO cause of action arises under 18 U.S.C.
§ 1964(c), which provides
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.
As is relevant here, this cause of action requires RWB
Services to adequately plead three things: (1) an “injur[y]
in [its] business or property” (2) “by reason of” (3) the
6 No. 07-3222
defendants’ “violation of section 1962.” See 18 U.S.C.
§ 1962(c). The district court held that RWB Services failed
at step two, a decision we review de novo, accepting any
factual allegations that RWB Services has properly pled. See
Vicom, Inc. v. Harbridge Merchant Svces, Inc., 20 F.3d 771,
776-77 (7th Cir. 1994).
RWB Services alleged in its pleadings that its injury
arose because it “was deprived of its property which
Defendants stole or obtained by fraud [and] then fraudu-
lently resold as new.” When Hartford purchased Old
Argus’s assets, the sale expressly excluded RWB Services’
cameras. Nonetheless, Hartford kept the returned cameras
sent back from Wal-Mart and then resold them as new. As
a result, RWB Services’ “property” was thus “injured”
when Hartford converted these cameras to use in its
purportedly fraudulent scheme.
In addition to its injury, RWB Services alleged that the
defendants had “violat[ed] 18 U.S.C. § 1962,” specifically
sections 1962(c) and (d). Section 1962(c) makes it
unlawful for any person employed by or associated
with any enterprise engaged in, or the activities of
which affect, interstate or foreign commerce, to con-
duct or participate, directly or indirectly, in the con-
duct of such enterprise’s affairs through a pattern
of racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c). And section 1962(d) makes it “unlawful
for any person to conspire” to violate any other subsection
of section 1962. 18 U.S.C. § 1962(d). In RWB Services’
estimation, the Graffias both operated an “enterprise”
involved in interstate commerce—Hartford, then
No. 07-3222 7
Impero—through a “pattern of racketeering activity,” 18
U.S.C. § 1962(c) and conspired to do the same, 18 U.S.C.
§ 1962(d).
To prove the “pattern of racketeering activity,” RWB
Services pointed to the violation of five of the statutes laid
out or referenced in 18 U.S.C. § 1961(1) as predicate acts:
the Illinois Consumer Fraud and Deceptive Business
Practices Act, 815 ILCS 505/1; 18 U.S.C. § 1341 (mail
fraud); 18 U.S.C. § 1343 (wire fraud); 18 U.S.C. § 1344
(bank fraud); and 18 U.S.C. § 2314 (the inter-
state transportation of stolen or fraudulently obtained
property). Four of these acts relate to the scheme to de-
fraud Wal-Mart by selling repackaged cameras as new,
consisting of the three claims of fraud and one of deceptive
trade practices under Illinois law. The other act alleges
the transportation of stolen or fraudulently obtained
property across state lines, an act that relates to RWB
Services’ loss of its cameras. The parties do not dispute
here that RWB Services has properly pled a “violation
of section 1962.”
The question on appeal is instead whether RWB Services
showed that its injury occurred “by reason of” this alleged
“violation.” Such a showing proves the plaintiff’s standing
and is thus jurisdictional. Gagan v. American Cablevision,
77 F.3d 951, 958 (7th Cir. 1996). And to make it, the plain-
tiff must prove, among other things, that the “pattern of
racketeering activity” both factually and proximately
caused its “injur[y]”. Holmes v. Securities Investor Protection
Corp., 503 U.S. 258, 268 (1992). The district court held that
RWB Services had failed to show either. As for factual or
8 No. 07-3222
“but for” causation, the district court pointed to a “gap”
in RWB Services’ causal chain: The court doubted that
RWB Services would still have received the cameras back
even if Hartford had not defrauded Wal-Mart with them.
The court also reasoned that RWB Services was not the
“direct victim of Defendants’ alleged scheme.” Accord-
ingly, Wal-Mart or its customers would be better plaintiffs
because the alleged scheme was primarily to defraud them.
Having failed on both fronts, the court held that RWB
Services did not have standing—and thus the court did not
have jurisdiction—and dismissed the complaint.
We disagree with both conclusions. First, RWB Services
properly pled cause in fact. RICO’s civil provision gives
a cause of action for those “injured in his business or
property by reason of a violation of section 1962.” 18 U.S.C.
§ 1964(c). The question here is whether the plaintiff’s
injury would have occurred “but for” the “violation of
section 1962.” Holmes v. Securities Investor Protection Corp.,
503 U.S. 258 , 268 (1992); Sedima, S.P.R.L. v. Imrex Co., Inc.,
473 U.S. 479, 495 (1985) (“If the defendant engages in a
pattern of racketeering activity in a manner forbidden by
these provisions, and the racketeering activities injure the
plaintiff in his business or property, the plaintiff has a
claim under § 1964(c).”); see also Evans v. City of Chicago, 434
F.3d 916, 926 n.22 (7th Cir. 2006). The typical question
asked in determining cause-in-fact is counterfactual:
would the claimed injury still have happened if the
defendant had not engaged in the tortious conduct alleged?
See W. P AGE K EETON ET AL., P ROSSER AND K EETON ON T ORTS
264 (5th ed. 1984); R ESTATEMENT (T HIRD ) OF T ORTS: L IABIL-
ITY FOR P HYSICAL H ARM § 26, cmt. b (Proposed Final Draft
No. 07-3222 9
No. 1 2005). This inquiry is a straightforward one in the
mine-run tort or negligence claim. A railway fails to fence
off a railroad track, and a child is struck by a train; had
the railway put up a fence, the child could not have
accessed the tracks and the accident would never have
happened. See P ROSSER AND K EETON ON T ORTS, at 264. Or
one person converts another’s property; but for the conver-
sion the loss of property would not have occurred.
Under RICO, however, such a simple question is harder
to ask. A defendant is liable for a “violation of section
1962,” and such a “violation” consists of, among other
things, a “pattern of racketeering activity,” which in turn
results from at least two predicate acts each with its
own essential elements. The district court reasoned that, if
the defendants had not obtained RWB Services’ cameras
in order to defraud its customers, they would have misap-
propriated the cameras anyhow or still refused to repay
the loan.3 Or, in other words, but for the actions under-
lying a few of the predicate acts alleged—those four
constituting the scheme to defraud Wal-Mart—RWB
Services’ injury would still have occurred. A literal ap-
3
The district court’s opinion also appears to limit the alleged
injury to the lost stream of payments from Hartford, a breach of
contract claim. There is admittedly some looseness at points
in the complaint with respect to the injury. But RWB Services’
alleged injury as it relates to the final predicate act concerns
its lost cameras. Nonetheless, for the reasons stated by the
district court, we agree that RWB Services could not show
causation under section 1964(c) with respect to this stream
of payments, as opposed to its stolen or lost cameras.
10 No. 07-3222
plication of the “but for” counterfactual could lead to
this articulation of the standard; for it is undeniably true
that but for the existence of the “pattern,” or a predicate
act, or its elements, there would be no “violation of section
1962.”
But we think the relevant question is instead whether the
plaintiff’s alleged injury would have resulted but for the
entire “violation of section 1962.” Anza, 547 U.S. at 457
(listing requirement that “the defendant’s violation . . . was
a ‘but for’ cause of his injury”) (quoting Holmes, 503 U.S. at
268); cf. 1 D AN B. D OBBS, T HE L AW OF T ORTS 417-18 (West
Group 2001). Although the plaintiff still must allege an
injury resulting from one of the predicate acts, see Beck v.
Prupis, 529 U.S. 494, 506 (2000), courts must examine
these acts in the context of the entire “violation” when
assessing factual causation. If a predicate act was suf-
ficient to cause the plaintiff’s injury and that predicate
act was part of the entire “violation of section 1962,” the
plaintiff has pled causation.
Here, the allegations in the complaint are that the
defendants developed a scheme to defraud Wal-Mart and
other customers by stealing or fraudulently obtaining used
cameras and reselling them as new. One part of the scheme
consisted of defrauding Wal-Mart. Specifically, RWB
Services alleges that the “Defendants’ pattern of racketeer-
ing is evidenced by [their] ongoing actions of fraudulently
and illegally selling returned, repackaged cameras . . . as
new.” In turn, RWB Services pled four predicate acts
relating to these purportedly fraudulent sales: deceptive
business practices under Illinois law, and federal mail,
No. 07-3222 11
wire, and bank fraud. The other part of the scheme con-
sisted of obtaining the cameras. RWB Services alleges that
the defendants “obtained the returned RWB cameras by
fraud.” Specifically, RWB Services says that Hartford
improperly kept its cameras after purchasing Old Argus’s
assets and kept returned cameras from Wal-Mart rather
than send them back to RWB Services. Nor, as alleged,
was RWB Services alone; there were other alleged victims
who lost their cameras as part of this scheme. These
allegations relate to the last predicate act: the interstate
transportation of stolen or fraudulently obtained property.
18 U.S.C. § 2314.
The district court did not question and the parties do not
dispute that these two parts of the scheme collectively
formed a “pattern,” meaning they were related and in
some sense ongoing. See H.J. Inc. v. Northwestern Bell
Telephone Co., 492 U.S. 229, 239 (1989); Corley v. Rosewood
Care Center, Inc. of Peoria, 388 F.3d 990, 1002 (7th Cir. 2004).
So we assume that the requirement has been met, as the
parties have waived the issue. Local 15, Intern. Brotherhood
of Elec. Workers, AFL-CIO v. Exelon Corp., 495 F.3d 779, 783
(7th Cir. 2007) (quoting Williams v. REP Corp., 302 F.3d
660, 666 (7th Cir. 2002)). As a result, the part of the
scheme concerning the acquisition of the cameras did not
happen for just any reason. Instead, as alleged, the defen-
dants took them precisely because of the need for the
cameras in order to “violat[e] section 1962.” And as the
one whose property was allegedly stolen or fraudulently
obtained as part of this “violation,” RWB Services has
pled the requisite causal connection between its injury—
lost cameras—and the scheme.
12 No. 07-3222
Second, we disagree that RWB Services’ injury was not
proximately caused by the “violation of section 1962.”
Proximate cause is a flexible concept that “label[s] generi-
cally the judicial tools used to limit a person’s responsibil-
ity for the consequences of that person’s own acts.” Holmes
v. Securities Investor Protection Corp., 503 U.S. 258, 269
(1992). At some point, even those who may claim a factual
injury are too far removed from the tortious act to be
able to recover. In examining whether a RICO violation
proximately caused the plaintiff’s injury, “the central
question . . . is whether the alleged violation led directly to
the plaintiff’s injuries.” Anza v. Ideal Steel Supply Corp., 547
U.S. 451, 461 (2006). Saying that the injury to the plaintiff
is “direct” is akin to saying that the victim was rea-
sonably foreseeable, the traditional principle for
hemming in tort liability. Such directness obviates the
difficulty in assessing damages from indirect injuries;
avoids complicated rules for apportioning damages
among several injured parties with greater or lesser
injuries; and provides the requisite level of deterrence for
RICO tortfeasors. Holmes, 503 U.S. at 270. The district
court reasoned that because Wal-Mart was the victim of
the fraud, which formed the greater part of the “violation,”
it was a distinctly better plaintiff than RWB Services. The
injury that RWB Services suffered, the court surmised,
was simply a bump in the road on the path to defraud Wal-
Mart.
But here RWB Services was a direct victim of the alleged
scheme, even if Wal-Mart was one as well. The existence
of multiple victims with different injuries does not fore-
No. 07-3222 13
close a finding of proximate cause; in fact, one of the
hallmarks of a RICO violation is “the occurrence of distinct
injuries” affecting several victims. See Morgan v. Bank of
Waukegan, 804 F.2d 970, 975 (7th Cir. 1986) (discussing
“pattern” requirements and listing “relevant factors” as
“includ[ing] the number and variety of predicate acts
and the length of time over which they were committed,
the number of victims, the presence of separate schemes
and the occurrence of distinct injuries”). In addition, the
predicate act that RWB Services claims injured
it—essentially fraud or theft of an interstate nature—has as
its victims those who have their property stolen or fraudu-
lently obtained; and here, that is RWB Services. See United
States v. Bond, 231 F.3d 1075, 1077-79 (7th Cir. 2000); United
States v. Dickerson, 901 F.2d 579, 584-85 (7th Cir. 1990). Nor
is it dispositive that the scheme envisioned defrauding
Wal-Mart as well, who could also potentially bring a
RICO claim. The existence of a “better” plaintiff is most
relevant where the plaintiff alleges only an indirect injury.
See Holmes, 503 U.S. at 272-74; Anza 547 U.S. at 461. It
will not otherwise be grounds for denying a claim to a
plaintiff directly injured by one predicate act in the
hopes that a different one will emerge. As alleged, the
defendants robbed Peter to defraud Paul; the former is as
foreseeable a plaintiff as the latter with as direct an injury.
As a result, RWB Services properly alleged that the
“violation of section 1962” proximately caused the loss
of its cameras.
14 No. 07-3222
III. Conclusion
For the foregoing reasons, we R EVERSE the decision
below and R EMAND for further proceedings consistent
with this opinion.
8-25-08