Antitrust Law Daily Wrap Up, RICO—5th Cir.: Fifth Circuit affirms that alleged scheme lacked continuity, (Apr 15, 2024)

By Donielle Tigay Stutland, J.D.

Although the alleged scheme cited several instances of fraud, the Fifth Circuit found the nature and singular objective of the underlying transaction do not support a finding of continuity to establish a pattern of racketeering.

The Fifth Circuit affirmed a lower court decision dismissing a lawsuit filed by D&T Partners LLC (D&T) alleging that Baymark Partners LP and several other entities violated RICO for failure to show a pattern of racketeering activity. D&T argued that the defendants conspired to defraud it of the $3.2 million secured loan D&T provided Baymark to purchase ACET Venture Partners, LLC, (ACET Venture) an e-commerce company. D&T claimed that the defendants fraudulently transferred the assets of ACET Venture to a newly created company intending to hide the secured assets from D&T. The complaint also alleged that the defendants performed various acts of mail and wire fraud, submitted falsified bankruptcy claims, and gave false testimony. The Fifth Circuit found the scheme, as alleged, did not violate the Racketeer Influenced and Corrupt Organizations Act (RICO). The Fifth Circuit concluded that although the plan ultimately took several years to realize, the number of victims and the nature and objective of the alleged scheme did not support an inference of a closed-ended pattern of racketeering activity conduct sufficient to state a RICO claim (D&T Partners, LLC v. Baymark Partners Management, LLC, April 4, 2024, Douglas, D.).

Background. D&T operated a successful company that specialized in online retail. In 2017, Baymark approached D&T with an offer to purchase’s assets in exchange for a sum of money and multimillion-dollar promissory note. Baymark set up the transaction as follows: D&T would purchase ACET Venture with a $3.2 million dollar secured loan. In return, a principal of D&T was appointed CEO of the successor company, ACET Global LLC. A Baymark partner subsequently borrowed money from another unrelated entity, Super G Capital LLC (Super G), and then terminated the CEO of ACET Global. Baymark then defaulted on the loan from D&T. In late 2018, the new CEO of ACET Global created a new entity, Windspeed Trading LLC (Windspeed). In January 2019, Super G issued a notice of forfeiture on all of ACET Global’s assets. Super G then arranged a foreclosure sale of those assets to Windspeed. Later that year, ACET Global filed for voluntary bankruptcy, however, that court closed the case without discharging ACET Global.

D&T sued the defendants claiming federal RICO violations, common law fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duties, violation of the Texas Uniform Fraudulent Transfer Act, civil conspiracy, and respondeat superior and/or agency liability. The defendants again filed individual motions to dismiss, with some including a statement that they were incorporating the arguments of the other defendants’ motions.

D&T filed its second amended complaint on June 8, 2022, which alleged many of the same facts as the original and first amended complaints. D&T’s primary changes included alleging approximately one hundred predicate acts, including mail fraud, wire fraud, theft of trade secrets, bribery, lying under oath, bankruptcy fraud, obstruction of justice, concealment versus eighteen predicate acts the court previously identified in the first amended complaint. The predicate acts also covered a longer period than the eighteen months pleaded in the first amended complaint with the latest pleading alleging mail fraud as far back as 2017.

RICO. The court began its analysis by reviewing D&T’s claims alleging violations of the RICO statute. D&T filed claims under three subsections of the RICO statute, §§ 1962 (a), (c) & (d). The court laid out the three common elements of each claim: “(1) a person who engages in (2) a pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control of an enterprise.”

D&T alleged that Baymark and the defendants engaged in a “series of elaborate, sophisticated, and coordinated acts of deception” with one mission in mind: “fraudulently siphon [Global’s] trade secrets and assets for its own benefit, transfer those assets from the reach of creditors and hide and conceal their conduct.” The scheme, D&T alleged, “caused harm to more than twenty-four RICO victims, including the bankruptcy trustee and Global’s creditors.”

The Fifth Circuit noted, “the crux of this case involves element two—whether Defendants engaged in a ‘pattern of racketeering activity.’” Under RICO, a pattern requires at least two predicate criminal actions. Predicate acts are “related” if they “have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” A RICO plaintiff can prove “continuity” by alleging “a closed period of repeated conduct,” or “past conduct that by its nature projects into the future with a threat of repetition.” Here, the parties did not dispute the “relationship element” of the pattern analysis, the issue was whether D&T’s complaint alleged closed or open-ended continuity.

While D&T alleged racketeering conduct occurring over “four years,” the court also made note of the absence of multiple targeted victims as relevant to the continuity inquiry. While D&T argued that the fraudulent scheme “duped” twenty-four victims in its effort to steal Global’s assets, the court noted that the complaint does not allege that the victims were targeted repeatedly through broad-based criminal conduct. Instead, the alleged victims suffered a derivative injury stemming from Global, who was the only targeted victim of the underlying transaction.

It was also highlighted that other courts have stressed that “a single scheme to accomplish ‘one discrete goal,’ directed at one individual with no potential to extend to other persons or entities” is not the type of racketeering “pattern” RICO seeks to prohibit. Although D&T’s complaint here cites several instances of fraud, the nature and singular objective of the underlying transaction did not support a finding of closed-ended continuity. The court also pointed out that all of the alleged unlawful actions related to a single scheme targeted at Global, which would be a finite scheme that achieved its goal once Global’s assets were transferred to Windspeed Trading, LLC.

However, the court posited that even without a closed-ended pattern, a plaintiff may nevertheless state a RICO claim by alleging “open-ended” continuity. An open-ended pattern may exist when the predicates “involve a distinct threat of long-term racketeering activity, either implicit or explicit.”

D&T also alleged open-ended continuity by contending the scheme to drain Global dry was not an isolated occurrence. D&T also alleged the Baymark parties engaged in similar schemes to advance a modus operandi: illegally acquiring significant equity stakes in companies for very little, or no, capital outlay. The court rejected this claim and determined that D&T has not alleged how any criminal activity would continue in the future. The court found the scheme was finite and reached its “natural conclusion” once it drained Global’s assets. The Fifth Circuit found that the complaint did not plead a threat of future criminal conduct. The Fifth Circuit concluded that D&T failed to show a pattern of racketeering and affirmed the district court’s decision in all respects.

The Case is No. 22-11148.

Attorneys: Jason B. Freeman (Freeman Law, P.L.L.C.) for D&T Partners, L.L.C, ACET Venture Partners, L.L.C. and ACET Global, L.L.C. Edward P. Perrin, Jr. (Hallett & Perrin, PC) for Baymark Partners Management, L.L.C. John David Blakley (Dunn Sheehan, L.L.P.) for Super G. Capital, L.L.C. Andrea Levin Kim (Daniels & Tredennick, P.L.L.C.) for SG Credit Partners, Inc., Edward P. Perrin, Jr. and Baymark ACET Holdco, L.L.C.

Companies: D&T Partners, L.L.C.; ACET Venture Partners, L.L.C.; ACET Global, L.L.C.; Baymark Partners Management, L.L.C.; Super G. Capital, L.L.C.; SG Credit Partners, Inc.; Baymark ACET Holdco, L.L.C.

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