Antitrust Law Daily Wrap Up, RICO—3d Cir.: Claim of mail fraud by security firms lacked evidence of fraudulent scheme, (May 6, 2016)

By Edward L. Puzzo, J.D.

Homeowners could not maintain RICO claims against security and property preservation firms that had allegedly broken into their home at the behest of their mortgage servicer because the homeowners failed to support their claims of mail fraud with any facts from which a scheme to defraud may be inferred, the U.S. Court of Appeals in Philadelphia has ruled (Hlista v. Safeguard Properties, LLC, May 5, 2016, Shwartz, P.).

In 2007, Anthony and Alexandra Hlista purchased a home in Bethel Park, Pennsylvania, secured by a mortgage. In 2012, during a 12-month period when the Hlistas were temporary living in South Carolina, they allege that their mortgage servicer Seterus hired security firm Safeguard Properties, LLC, who in turn hired property preservation firms Essential Services, Inc. and Mitchell Home Service, to "break into" their Pennsylvania home on at least three different occasions to put in a new Seterus-branded lockbox, to install a doorknob, and to nail windows shut. The Hlistas allege that their mortgage loan was never in default and the property was not subject to foreclosure. Based on these activities, the Hlistas brought Racketeer Influenced and Corrupt Organizations Act (RICO) claims against the security and property preservation firms. The district court granted defendants' motion for judgment on the pleadings, and plaintiffs appealed.

The appellate court explained that a substantive RICO claim under Section 1962(c) requires allegations of (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Liability requires participation in a least two predicate acts, constituting a pattern. Where, as here, the predicate acts alleged are mail and wire fraud, plaintiffs are subject to the heightened pleading standard for fraud set forth in Fed. R. Civ. P. 9(b).

Scheme to defraud. The Hlistas claimed that the defendants committed the RICO predicate acts of wire fraud by communicating by mail and electronically their plans to break into the Hlistas' property. But the court noted that their allegations failed to set forth the precise misrepresentations or omissions that were “calculated to deceive” or how they were connected to a fraudulent scheme to mislead or deceive the Hlistas or any other person. Because the Hlistas failed to allege facts from which a scheme to defraud may be inferred, they failed to state a claim under Section 1962(c), the court ruled. Consequently, the appellate court affirmed the district court's grant of judgment on the pleadings in favor of the defendants.

The case is Civil Action No. 15-1812.

Attorneys: Jonathan R. Burns (Malakoff Doyle & Finberg) for Alexandra Hlista. Markus E. Apelis (Gallagher Sharp) for Safeguard Properties LLC. William D. Clifford (Dickie McCamey & Chilcote) for Essential Services Inc.

Companies: Safeguard Properties LLC; Essential Services Inc.

Cases: RICO DelawareNews NewJerseyNews PennsylvaniaNews