Antitrust Law Daily Wrap Up, RICO—7th Cir.: Awards of $7 million in damages, $13 million in attorney fees upheld in tax lien bidding fraud case, (Aug 27, 2013)

By Peter Reap, J.D., LL.M.

A jury’s awards of $7 million in damages and $13 million in attorney fees and related expenses to BCS Services, Inc., and Phoenix Bond & Indemnity Co. (the “plaintiffs”), on their claims for mail fraud under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et seq., and for interference with a prospective business advantage under Illinois tort law were affirmed by the U.S. Court of Appeals in Chicago (BCS Services, Inc. v. BG Investments, Inc., August 23, 2013, Posner, R.). The arguments on appeal by the two remaining non-settling groups of defendants, Sass and Gray (the “defendants”), were without merit.

Background. Cook County, Illinois, sells its tax liens at auctions. The auctions are conducted in rapid-fire fashion in a room in which the bidders bid by raising a card with their bidder ID number and shouting out the penalty percentage that they are bidding. The County’s rules permit only one agent of a potential buyer, or of a group of cooperating buyers (“related entities”), to bid. Otherwise a potential buyer could increase the likelihood of winning by packing the room.

If a company’s violation of the prohibition against bidding by multiple bidders was concealed and thus operated as a fraud on the one-armed bidders (that is, the bidders who complied with the single-bidder rule), the company would have engaged in a pattern of mail fraud in violation of RICO because the County uses the mails to notify property owners that the County has sold its tax liens on the property and that unless the past-due taxes are paid the property will be forfeited to the lienor.

Sass and Gray should have had only one arm to bid with at each auction session; instead each had as many arms as it had members, the court noted. Each group had (offstage) a kingpin who financed the group’s bidding activity. When a member of the group won a lien, the kingpin would buy it from him. At the end of a four-week trial, a jury found in favor of the plaintiffs and awarded damages against the two remaining groups totaling, after various adjustments, some $7 million, to which the judge added some $13 million in plaintiffs’ attorney fees and related expenses.

Analysis

Property interest in tax liens. The defendants first argued that the plaintiffs were not victims of mail fraud because they had no property interest in the tax liens that they were prevented by the fraud from buying. The premise of the defendant’s argument was true, but irrelevant, the appellate court held.

It was true that the criminal act on which the RICO claim was based—mail fraud—requires that the defendants have obtained “money or property” by fraud. 18 U.S.C. § 1341. But tax liens, which was what the defendants obtained, were property, according to the court. The property to which section 1341 referred did not need to be the plaintiffs’, provided they were directly injured by the defendants’ unlawful acquisition of the property. The defendants took from the County property that, had they not taken it, would have been obtained by the plaintiffs at the same time in the same place—the auction room.

Jury instructions. The trial court judge was correct to deny the defendants’ request to instruct the jury that it could not find for the plaintiffs “if there has been only a deprivation of intangible rights to a fair opportunity to obtain money or property,” the court decided. The instruction was irrelevant. The plaintiffs were not complaining about a deprivation of intangible rights, such as a right to honest service by an agent; they were complaining about a fraud that caused them a money loss.

Next, the defendants objected to the judge’s refusal to instruct the jury that “statements made when there is a good faith disagreement about the applicable governing law or when the law is unclear are not false.” Such an instruction would have been “preposterous,” according to the appellate court. A statement could be false even though the person making it has a good-faith belief, even a perfectly reasonable belief, that it was true.

Expert testimony. The defendants complained about an adjustment that the plaintiffs’ damages expert made concerning the number of tax liens on which the plaintiffs bid in competition with the defendants. He made the adjustment after seeing a video of part of the 2007 auction, one of the auctions embraced by the suit. The defendants argued that the district judge should have subjected this adjustment to a Daubert examination to determine whether the expert should have been permitted to offer his revised estimate at the trial.

Subjecting the expert’s adjustment to a Daubert examination would have been a waste of time, because it was clear that the adjustment that the expert made on the basis of the video was reasonable, the appellate court reasoned. This was a case in which the defendants’ misconduct prevented the plaintiffs from calculating damages accurately—and in such cases damages could be estimated by methods that would be deemed impermissibly speculative in other contexts. The unavoidable element of speculation in the adjustment of damages on the basis of the video was within permissible bounds. Moreover, the defendants’ objection that the expert’s method of calculating damages exaggerated each defendant’s proper share was rejected.

Damages. The plaintiffs’ state law claim was for tortious interference with a business opportunity, and the jury awarded punitive damages for the tort. The defendants argued that this was double counting, because the damages for the same activity that were awarded for the defendants’ violation of RICO were treble the loss that the violation had inflicted on the plaintiffs, yet the same acts had been charged as violations both of RICO and of state tort law. Since the appellate court was bound by the Supreme Court’s interpretation of RICO’s treble-damages remedy as being compensatory rather than punitive, this defeated the defendants’ argument, the court stated.

Sass made a somewhat related argument, that the district judge violated the “one-satisfaction” rule by not allowing Sass to set off against its damages liability the full amount that the plaintiffs received in settlement of claims against other participants in the tax-lien fraud, the court observed. The judge did allow a setoff, but only after deducting his estimate of how much of the total amount of the settlements was in respect of liability to pay punitive damages, pursuant to the rule that money paid in settlement of punitive damages claims is not subject to setoff.

The defendants insisted that because the settlement agreements did not mention punitive damages the entire amount of the settlements must be compensatory. The defendants were wrong, the court explained. The parties negotiating the settlements were sophisticated and must have been aware that an award of punitive damages for fraud would be likely if there were a trial. That awareness would have influenced the amount of the settlement.

Attorney fees. Lastly, the defendants made three arguments concerning the amount of attorney fees and expenses that the district judge awarded the plaintiffs. They first argued that the award included fees that the plaintiffs’ lawyers expended in investigating other actually or possibly ineligible bidders at the tax-lien auctions in which the plaintiffs participated. Yet these investigations were essential, the appellate court determined. Without them the plaintiffs would not have known whether the harm they suffered was attributable only to the defendants or to others.

The defendants’ argument that the plaintiffs should have been required to allocate a portion of their attorney fees to the settlements they made with other parties accused of ineligible bidding was without merit. The judge found, not clearly erroneously, that the injuries were separate.

Finally, the contention that the fee award was excessive because it was almost twice the damages awarded the plaintiffs at trial was rejected. Attorney fee shifting, as under RICO, was intended to facilitate suit by victims of unlawful behavior. The defendants were hyperaggressive adversaries and they drove up the plaintiffs’ legal costs without justification.

The case is Nos. 12-3235, -3241, -3281, -3292, 13-1052, -1055–56, -1060, -1433, -1435, 1449–50.

Attorneys: Richard J. Prendergast for BCS Services, Inc. Arthur W. Friedman (Miller, Shakman & Beem LLP) for BG Investments, Inc.

Companies: BCS Services, Inc.; BG Investments, Inc.

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