KAUSHAL v. STATE BANK OF INDIA No. 82 C 7414.
556 F.Supp. 576 (1983)
Satya P. KAUSHAL, et al., Plaintiffs, v. STATE BANK OF INDIA, et al., Defendants.
United States District Court, N.D. Illinois, E.D.
As Amended March 1, 1983.
Joseph R. Marconi and Douglas K. Morrison, Marconi & Morrison, Chicago, Ill., for plaintiffs.
Gary L. Starkman, Arvey, Hodes, Costello & Burman, Chicago, Ill., for defendants State Bank of India and officers.
MEMORANDUM OPINION AND ORDER
SHADUR, District Judge.
Satya Kaushal ("Kaushal"), Vinod Kaushal and Raja Enterprises, Inc. and its subsidiaries (collectively "Raja Companies") have sued the State Bank of India ("SBI"), several of its officers and employees and several other individual and corporate defendants for treble damages and injunctive relief under 18 U.S.C. § 1964(c) ("Private RICO" or, consistently with the manner in which all other sections of Title 18 are cited in this opinion, "Section 1964(c)").
For a number of years before May 1981, SBI had an extensive business relationship with Patson Enterprises, Inc. and its affiliated corporations (collectively "Patson Companies"). During that time SBI officers N.G. Pallai ("Pallai") and Annada Kumar ("Kumar") had close business and personal relationships with Naren Soni ("Soni"), Patson Companies' principal shareholder.
By late 1979 or early 1980 SBI had more than $2 million in loans outstanding to Patson Companies. Pallai, Kumar and Soni knew (1) Patson Companies could not repay those loans to SBI, (2) Soni was personally liable to SBI on the loans and (3) SBI officials in Bombay would judge unfavorably the performance of Pallai and Kumar in making the loans to Patson Companies.
Pallai, Kumar and Soni conceived and executed a scheme to defraud plaintiffs by conducting and operating SBI and Patson Companies by a pattern of racketeering activities, including numerous uses of the United States mails in violation of Section 1341. Acting to benefit themselves, SBI and Patson Companies, they presented Kaushal with false financial statements
It was also part of the scheme that, as plaintiffs began discovering the fraud, SBI would seize by foreclosure the one solvent business in the Raja group, the Khyber India Restaurant (the "Restaurant") and sell it to Chatwal Hotels & Restaurants, Inc. ("Chatwal Corp.") and its principal, Sant Chatwal ("Chatwal"), an important SBI customer in New York. This aspect of the proposed scheme (not yet implemented) has been conducted by seven persons
Scope of Private RICO
Private RICO, part of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), Sections 1961-68, reads:
Section 1962 in turn specifies the activities prohibited under RICO. Private RICO thus creates a private right of action tied by its very terms to the proscription of certain criminal conduct.
As RICO's very name suggests, and as United States v. Turkette, 452 U.S. 576, 591, 101 S.Ct. 2524, 2532, 69 L.Ed.2d 246 (1981) teaches, "the major purpose of [RICO] is to address the infiltration of legitimate business by organized crime." From this fact defendants argue (Dec. 8 Mem. 5-10) the present action falls outside the spirit (if not the letter) of RICO because there are no allegations defendants are in any way connected with organized crime.
Most courts have an understandable intuitive reaction that Private RICO was not intended — and should therefore not be construed — to sweep up the entire universe of common law fraud. Perhaps for that very reason, defendants' argument has met with some success in the courts. See Bennett v. Berg, 685 F.2d 1053, 1063 (8th Cir.1982) (citing cases), rehearing en banc, Jan. 12, 1983. But the weight of both judicial and scholarly authority is properly against employing such reasoning. See id. at 1063-64. In the criminal context our own Court of Appeals has held RICO does not require proof a defendant is connected with organized crime. United States v. Aleman, 609 F.2d 298, 303-04 (7th Cir.1979), cert. denied, 445 U.S. 946, 100 S.Ct. 1345, 63 L.Ed.2d 780 (1980). It should also follow that a cause of action under Private RICO, predicated on violations of Section 1962, would lie though there is no allegation defendants are involved with organized crime or racketeers.
Although it too rejects that entirely unfounded limitation on Private RICO, this Court has expressed its own concern lest Section 1964(c) become a vehicle for asserting "garden variety fraud claims" in federal court. Parnes v. Heinold Commodities, Inc., 548 F.Supp. 20, 23 (N.D.Ill.1982); see also Fields v. National Republic Bank of Chicago, 546 F.Supp. 123, 124-25 (N.D.Ill. 1982); Salisbury v. Chapman, 527 F.Supp. 577, 579-81 & nn. 2-6 (N.D.Ill.1981). However, this Court has not permitted that concern
Section 1962 sets out three basic patterns of prohibited activities and a related conspiracy provision:
Those patterns do sweep broadly, especially given the expansive definitions of "racketeering activity," "person," "enterprise" and "pattern of racketeering activity" in Sections 1961(1) and 1961(3)-(5) ("Section 1961"). Nevertheless it is against those patterns that Private RICO claims must be tested. Strict adherence to Congress' language will sustain only claims meeting Congress' own tests. Such an approach ("strict constructionism," if you will) both accepts the breadth of Congress' language and honors the limits of Congress' provision of a federal cause of action.
In other words, a defendant should face Private RICO liability only if alleged to have assimilated himself by his own conduct to the patterns of conduct Congress proscribed.
Count I: Private RICO Damages
Section 1964(c) grants a damages remedy to those injured "by reason of a violation of section 1962." It is only logical to couple such "violation" with the law violator under Section 1962: the "person" whose activity is labeled as "unlawful" in that section. See Parnes, 548 F.Supp. at 23-24.
Certainly the Complaint's allegations are sufficient to place SBI, Pallai, Kumar and Soni in violation of Section 1962(c) or, in other words, to identify them as potentially liable Private RICO "persons."
Complaint ¶ 17 alleges Soni, Pallai and Kumar, the latter two acting of course as SBI officers and for SBI's benefit (id. ¶ 18), conducted and operated Patson Companies, "enterprises" allegedly engaged in interstate commerce (id. ¶ 8), by a pattern of "racketeering activity" (numerous acts of mail fraud aimed at Kaushal). Thus those allegations have set out four RICO "persons," a RICO "enterprise," the character of their "association,"
No allegations tie the other SBI officers to actual participation (direct or indirect) in the conduct of Patson Companies' affairs. Complaint ¶ 19 says C. Gupta, Angle, Deepa, Sadasivan and Sridhran participated in causing Kaushal and his wife to guarantee the Raja Companies' loans from SBI, but there is no indication this aspect of the alleged scheme involved Patson Companies at all. Similarly Complaint ¶ 20 says Sadasivan, Sridhran, B. Gupta and Padnaban participated in SBI's plan to reclaim the Restaurant, but here too no involvement with Patson Companies is indicated.
Moreover, there is no allegation those seven SBI officials conspired to conduct Patson Companies' affairs through racketeering activities, as contrasted with conspiring in the plans to obtain the loan guaranties and to reclaim the Restaurant. Thus Section 1962(d) is not available to connect those seven to the SBI-Pallai-Kumar-Soni violation of Section 1962(c).
That is not the end of the Private RICO story, however. It is surely conceptually possible for two RICO "enterprises" to have been involved here — not only Patson Companies but SBI itself. From the latter perspective, shifting SBI chameleon-like from "person" to "enterprise," the same analysis would involve those seven officers
Accordingly Count I stands not only against the SBI-Pallai-Kumar-Soni group but against the seven SBI officers as well.
Count II: Private Equitable Relief under RICO
Complaint Count II seeks to block SBI's sale of the Restaurant and to divest defendants of any interest they have acquired in the Restaurant. That prayer for broad equitable relief under RICO forces consideration of the threshold question whether Section 1964 makes equitable remedies available to Private RICO plaintiffs. In turn that "difficult question"
Section 1964 provides (although quoted earlier, Private RICO is repeated for ease of comparison and analysis):
Two commentators have asserted the use of "and [shall]" (instead of "to") before the treble-damages recovery clause in Private RICO implies the private damages remedy is in addition to other equitable remedies. Blakey and Gettings, Racketeer Influenced and Corrupt Organizations (RICO): Basic Concepts — Criminal and Civil Remedies, 53 Temple L.Q. 1009, 1038 & n. 133 (1980) ("Basic Concepts").
Section 1964(c) certainly in terms grants only a private treble-damages remedy. True, it does not expressly say "only" the damages remedy is granted,
To the extent the statute may be viewed as ambiguous, this Court must turn to the legislative history to divine legislative intent. In this instance, as in many others, the legislative history is not precise. On the whole, however, that history strongly indicates Congress did not intend to grant private RICO plaintiffs equitable remedies in addition to the legal remedy provided in Section 1964(c). That conclusion is compelled if this Court follows, as it must, applicable Supreme Court guidelines.
RICO began as a Senate bill, S.30, 91st Cong., 1st Sess. (1969). As reported by the Senate Judiciary Committee S.30 § 1964 did not contain a private right of action provision at all, and the committee report therefore discussed only civil RICO actions by the United States. S.Rep. No. 617, 91st Cong. 1st Sess. 24, 34, 80-83, 160 (1969).
Two inferences may logically be drawn from the legislative history (both the statutory structure and the committee reports):
Additionally persuasive is the fact the House Committee's description of S.30 § 1964(a) follows almost verbatim the Senate Committee's description of that subsection (without the slightest hint of any expansion of coverage to parallel the newly-added private damages remedy). Compare H.R.Rep. No. 1549, reprinted in 1970 U.S. Code Cong. & Ad.News at 4034, with S.Rep. No. 617 at 160. The House's repetition of the language that "the list [of remedies] is not exhaustive," first expressed by the Senate when only the government could sue at all, belies the effort by Basic Concepts at 1038 n. 132 to find in that language the implication of private equitable remedies. Plainly the House Committee's addition of the private damages remedy had not altered the public-action thrust of the other subsections of S.30 § 1964.
Moreover the Senate Committee Report emphasizes the analogy of Section 1964 to the antitrust laws. S.Rep. No. 617 at 81-82. That general analogy was clearly behind much of Congress' thinking in enacting the civil RICO provisions. See Basic Concepts at 1040-43; Public Interest at 688-89, 712. But by sharp contrast with Section 1964, the antitrust laws specifically and in terms provide a separate private equity action in addition to a private treble damages remedy. 15 U.S.C. §§ 15 and 26.
USACO surely does not aid plaintiffs here (in fact it suggests Section 1964(c) does not authorize creative equitable relief for Private RICO plaintiffs).
In a forthcoming article Professor Blakey (co-author of Basic Concepts) returns to his study of Private RICO and asserts (The RICO Civil Fraud Action in Context: Reflections on "Bennett v. Berg",  Notre Dame L.Rev. , ):
But what is apparently invisible to the academic eye is readily discernible by this Court's: For better or worse, current Supreme Court doctrine sharply limits the implication of rights of action or remedies where Congress has not provided them. As Professor Blakey quietly admits, the issue here is really one of finding a congressional implication where there is no explicit congressional declaration — and the Supreme Court's guidelines for directing that judicial enterprise provide a mandate, not only a "satisfactory rationale," for not vivifying Professor Blakey's theories.
In Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 246, 62 L.Ed.2d 146 (1979) the Supreme Court said:
Accord, Touche Ross & Co. v. Redington, 442 U.S. 560, 571-74, 99 S.Ct. 2479, 2486-88, 61 L.Ed.2d 82 (1979). In reaffirming the same principle in Middlesex County Sewerage Authority v. National Sea Clammers Ass'n, 453 U.S. 1, 14-15, 101 S.Ct. 2615, 2623-24, 69 L.Ed.2d 435 (1981), the Supreme Court taught a court may read additional judicial remedies into "elaborate [statutory] enforcement provisions" only where "strong indicia of a contrary congressional intent" negate the implication "Congress provided precisely the remedies it considered appropriate."
In the case of Private RICO there are no "strong indicia" — in the structure of Section 1964, in its legislative history, in the absence of explicit language of exclusivity in subsection (c), or in any combination of those elements — of Congress' intent to infer private equitable remedies under RICO. In fact the evidence points precisely in the opposite direction. See Sea Clammers, 453 U.S. at 17-18, 101 S.Ct. at 2624-25. Contrast the circumstance in Herman & MacLean v. Huddleston, ___ U.S. ___, ___ - ___, 103 S.Ct. 683, 686-92, 74 L.Ed.2d 548 (1983), where the Supreme Court found indications of a specific congressional intent to cumulate remedies available under federal securities laws. Count II must be dismissed.
Count III: State Law Damages
Count III advances a state law fraud claim for compensatory and punitive damages. Under United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966) this Court has the constitutional power to hear nonfederal claims between federal action parties so long as both federal and nonfederal claims arise from a "common nucleus of operative fact." Actual exercise of that power, however, is a matter of this Court's discretion. Id. at 726, 86 S.Ct. at 1139.
Here the state law fraud claims clearly derive from the same "nucleus of operative fact" that gives rise to plaintiffs' RICO damages claims. Moreover the factors involved in the exercise of this Court's discretion — judicial economy, convenience and considerations of fairness to litigants (id.) — all point toward allowing the state fraud claims to be asserted pendent to plaintiffs' Private RICO damages claims.
Count IV: State Law Injunctive Relief
Complaint Count IV's prayer for relief repeats the prayer for RICO injunctive relief under Count II. Yet plaintiffs have identified no state law authority for ordering divestiture of SBI's security interest in the Restaurant. Indeed Count IV on the whole (¶ 21) seems aimed at future action by SBI: possible sale of the Restaurant.
On the latter score, plaintiffs simply assert (id.), without any supporting facts, "no adequate remedy at law exists" for their possible loss of the Restaurant. To the contrary, the Complaint itself confirms damages is an adequate remedy.
By its terms the December 6, 1982 TRO has remained in effect as to SBI pending issuance of this opinion. Because this Court has concluded Section 1964(c) does not provide private RICO plaintiffs equitable remedies, the TRO will be treated as having expired at 5 p.m. today.
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