Antitrust Law Daily Wrap Up, RICO—3d Cir.: Continuity requirement in RICO claims involving real estate exchange scheme not met, (Jun 15, 2018)

By Lee P. Dunham, J.D.

In a non-precedential opinion, the Third Circuit affirmed a grant of summary judgment against two individual plaintiffs who asserted RICO claims against a pair of related entities that they alleged had participated in a fraudulent scheme involving § 1031 Real Estate Exchanges. The court based its decision on the fact that the plaintiffs had alleged a pattern of racketeering lasting only for nine-and-a-half months, which was insufficient to establish the "continuity" requirement of a RICO violation, which requires more than twelve months of illegal conduct (Germinaro v. Fidelity National Title Insurance Co., June 14, 2018, Jordan, K.).

The plaintiffs entered into an exchange agreement with an entity related to the defendants in October, 2008. The plaintiffs sought to exchange a Pittsburgh investment property worth around $800,000 for another property located in the area. The exchange agreement provided that the entity would acquire the relinquished property from the plaintiffs and convey the replacement property back to them. The entity agreed to hold and apply the funds from the sale of the relinquished property to acquire the replacement property on the plaintiffs’ behalf. The funds were to be deposited in a bank account, and the plaintiffs were to receive interest on the funds. The plaintiffs believed that the entity would place their exchange funds in a segregated account with its own account number, but the funds were placed in a commingled account with other customers’ funds.

Before the entity could acquire and transfer the replacement property to the plaintiffs, it experienced liquidity problems due to a number of pre-existing failed investments in "Account in Auction Rate Securities" (ARSs), a student-loan backed debt instrument which had been considered relatively low-risk. However, in February 2008, the ARS market suddenly froze and the entity’s investments became illiquid. The entity filed a petition for bankruptcy in November of 2008. The bankruptcy court ruled that the exchange funds held in the commingled account were property of the bankruptcy estate rather than property of the entity’s individual customers, including the plaintiffs.

The plaintiffs filed RICO claims against the defendants, alleging that the defendants participated, together with others, including the entity with which the plaintiffs had entered into the exchange agreement and various corporate officers, in a scheme and conspiracy to run a 1031 Ponzi scheme long enough for the ARS freeze to thaw.

The court stated that to establish a RICO claim under § 1962(c), a plaintiff must demonstrate, inter alia, that the predicate acts "amount to or pose a threat of continued criminal activity." This requirement is commonly known as the "continuity" requirement, and can be met either by a showing of "closed-ended continuity," or a "closed period of repeated conduct," or "open-ended continuity," which refers "to past conduct that by its nature projects into the future with a threat of repetition."

The court held that the plaintiffs had alleged a "closed-ended" scheme, as the complaint "focuse[d] overwhelmingly on an alleged Ponzi scheme that occurred over a precisely defined period of time from February 11, 2008, to November 26, 2008, which corresponds roughly with the ARS market freeze." However, the court held that precedent "clearly establishes that predicate acts spanning less than twelve months fail as a matter of law to establish closed-ended continuity." Thus, the plaintiffs had not satisfied the continuity requirement, and summary judgment was properly granted on their RICO claims.

The case is No. 17-1640.

Attorneys: Michael P. Denver (Hollister & Brace) for Joseph J. Germinaro. Erica L. Calderas (Hahn Loeser & Parks LLP) for Fidelity National Title Insurance Co. and Commonwealth Land Title Insurance Co.

Companies: Fidelity National Title Insurance Co.; Commonwealth Land Title Insurance Co.

Cases: RICO DelawareNews NewJerseyNews PennsylvaniaNews