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From Antitrust Law Daily, May 30, 2013

Claims of Financing, Insurance Fraud Alleged Open-Ended Racketeering Activity

By John W. Arden, J.D., LL.M.

A purchaser of a horseback riding center, claiming that the seller pursued a fraudulent financing and insurance scheme in violation of federal RICO law, alleged a pattern of racketeering activity supporting an inference of open-ended continuity, according to the U.S. Court of Appeals in Richmond, Virginia (CVLR Performance Horses, Inc. v. Wynne, May 29, 2013, Shedd, D.). The dismissal of the RICO claim for failure to plead sufficiently continuous racketeering acts was reversed and remanded to the federal district court in Lynchburg, Virginia, for further proceedings.

Background. CVLR Performance Horses, Inc. and its president, Crystal Rivers, alleged that John L. Wynne sold a riding center by misrepresenting that his company, Rivermont Consultants, was a bank that would finance the purchase. Because Rivermont was not a bank, Wynne arranged for Old Dominion National Bank to provide the financing. Wynne allegedly proceeded to cut CVLR out of the transaction, arranging for another of his companies, 1650 Partners, to purchase the riding center, with Rivers serving as a guarantor on the loan.

In addition, Wynne allegedly worked with Rivers to purchase and finance a truck for CVLR’s use, resulting in Rivermont owning the truck and CVLR obligated to repay a loan. Wynne was charged with purchasing another truck in Rivermont’s name, but adding it to Rivers’ insurance policy without her knowledge. When Wynne’s son totaled the second truck, Wynne collected the insurance payment of $10,630, CVLR claimed.

Wynne allegedly diverted more insurance funds from CVLR to Rivermont, after high winds damaged the riding center’s barn. After CVLR filed a claim, the insurance company issued checks jointly to CVLR and Old Dominion, but Wynne had an Old Dominion employee transfer the funds to the account of 1650 Partners, representing that he would use the money to repair the wind damage and make “capital additions” to the riding center. The barn remained unrepaired, according to the complaint.

CVLR sued Wynne and his companies, asserting a violation of federal RICO and three state law claims. The defendants moved to dismiss, arguing that the complaint failed to state a claim for which relief may be granted. The district court granted the motion on the RICO claim, declined to exercise supplemental judgment on the state law claims, and dismissed the action.

Continuity. The district court found that the racketeering acts alleged in the complaint were not sufficiently continuous to support a RICO claim, since CVLR did not plead sufficient facts to show either “closed-ended” or “open-ended” continuity. It concluded that CVLR failed to plead open-ended continuity because each racketeering act did not, on its face, threaten to continue long term and because the racketeering activity had a “built-in ending point.” The district court found it implausible that the racketeering acts would continue into the future because all of the victims identified in the complaint “have been bilked” and, presumably, know better than to do more business with the defendants.

To survive the defendants’ Rule 12(b)(6) motion, CVLR’s complaint must establish “facial plausibility” by pleading factual content that allows the court to draw the reasonable inference that defendants are liable for the alleged misconduct. RICO prohibits being associated with any enterprise and conducting or participating in the conduct of such enterprise’s affairs through a pattern of racketeering activity. To plead a pattern of racketeering activity, a plaintiff must allege acts that are both related and continuous. The two types of continuity supporting a RICO claim are “closed-ended” and “open-ended.”

Although the district court found that the complaint did not plead sufficient facts to show either type of continuity, CVLR challenged only the court’s conclusion that the complaint failed to support an inference of open-ended continuity. The Fourth Circuit agreed with this challenge, finding that the facts in the complaint did support an inference of open-ended continuity.

The district court’s conclusion that each racketeering act did not threaten to continue long term overlooked the more general point that the defendants’ conduct “projects into the future with a threat of repetition.” The complaint alleged that Wynne used Rivermont and 1650 Partners for over three years in a series of racketeering acts by luring victims into a scheme through representing Rivermont as a bank. CVLR alleged that Rivermont continues to advertise itself as a bank, and the complaint created no inference that Rivermont ended its fraudulent activities. Thus, the allegations of the complaint supported an inference that the activity projects itself into the future with a threat of repetition and that racketeering acts are the defendants’ “regular way of doing business.”

The finding that the amended complaint failed to plead open-ended continuity because the racketeering activity had a “built-in ending point” was also rejected by the appeals court. The lack of a threat of continuing racketeering activity cannot be asserted merely by showing “a fortuitous interruption of that activity,” the Fourth Circuit held.

Since the complaint successfully pleaded open-ended continuity, the district court’s dismissal of the action was reversed and the case was remanded for further proceedings.

The cases are Nos. 12-1591 and 12-1787.

Attorneys: Gary M. Bowman for CVLR Performance Horses, Inc. Chad Allan Mooney (Petty, Livingston, Dawson & Richards, PC) for John L. Wynne

Companies: CVLR Performance Horses, Inc.; 1650 Partners, LLC; Rivermont Consultants, Inc.

MainStory: TopStory RICO MarylandNews NorthCarolinaNews SouthCarolinaNews VirginiaNews WestVirginaNews

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