Antitrust Law Daily Wrap Up, RICO—D. Minn.: RICO claims against partner in farming operation, farming coop, and coop employees dismissed, (Jul 9, 2015)

By Michael Menzhuber, J.D., LL.M.

A civil claim under the Racketeer Influenced and Corrupt Organizations Act (RICO) against a partner in a farming operation, a farmer-owned cooperative, and certain cooperative employees was dismissed by the federal district court in Minneapolis (Nelson v. Nelson, July 8, 2015, Montgomery, A.).

Background. Steven Nelson (Steven) operated J&S Nelson Farms, LLP (J&S) with his brother James Nelson (James). Their partnership agreement designated them as 50/50 partners in J&S’ profits and losses. James was responsible for the partnership’s financial matters and, at the time the complaint was filed, Steven was no longer involved in the partnership.

Steven alleged that James, along with AgCountry, a farming cooperative, and two of its employees, Chris Feller and Randy Skjerven (collectively, “defendants”) committed mail and wire fraud, tax evasion, forgery, bank fraud, and money laundering when, according to Steven, in 1998 they began diverting J&S funds for their benefit.

Pattern of Racketeering Activity. The court noted that to sufficiently plead a RICO violation, a plaintiff must show conduct of an enterprise through a pattern of racketeering activity. It determined that even if Steven had sufficiently pled the “enterprise” requirement, his RICO claim failed because he did not allege that the defendants: (1) engaged in a “pattern of racketeering activity”; and (2) committed a “predicate RICO offense.”

To satisfy the “pattern of racketeering” requirement, a plaintiff must allege “two or more related acts of racketeering activity that ‘amount to or pose a threat of continued criminal activity.’” Nitro Dist., Inc. v. Alticor, Inc., 565 F.3d 417 (2009). The court determined that, although Steven alleged the defendants’ acts amounted to multiple, discreet schemes, they were entwined in the same fraudulent scheme; the scheme to defraud Steven from his partnership interest.

The court noted that even if the “pattern of racketeering activity” had been adequately pled, Steven’s RICO claim would still fail because he did not plead a predicate RICO crime. Steven alleged as RICO predicate crimes: (1) mail fraud; (2) wire fraud; (3) tax evasion; (4) forgery; (5) bank fraud; and (6) money laundering.

The court determined that tax evasion and forgery are not predicate RICO crimes listed in 18 U.S.C. § 1961(1). It then determined that Steven’s allegation of mail and wire fraud against James failed because he did not allege that James used mail or wires to communicate any false or misleading statements or that his use of the mail and wires was incident to an essential part of the scheme. With respect to Steven’s allegation that James defrauded him by falsely allocating personal withdrawals to Steven’s draw account, the fraudulent act was the improper allocation of the withdrawal, not the withdrawal itself, With respect to the allegation that James improperly assigned partnership funds to pay for personal expenses, the mail or wire was simply a conduit to satisfy James’ debt obligations.

Similarly, Steven’s allegations that Feller prepared electronically filed fraudulent tax returns did not sufficiently allege mail or wire fraud because Feller’s limited use of the mail or wire to file tax returns was not an essential component of the fraud and did not directly harm Steven. Steven’s allegation that Skjerven initiated wire transfers to aid James’ alleged theft also was not a fraudulent act because the fraud was falsely attributing the withdrawals which did not involve a wire transfer. Steven’s fraudulent loan allegations were also insufficient because James had partnership authority to incur the debt. Finally, AgCountry’s alleged involvement did not constitute mail or wire fraud because they were dependent upon Skjerven’s actions.

The court determined that Steven failed to allege bank fraud as a predicate RICO act because Steven was an individual and only financial institutions have standing to assert bank fraud as predicate RICO act.

Lastly, the court determined that Steven’s money laundering claim failed, as a matter of law, because he did not identify a specific unlawful activity, distinct from the alleged racketeering scheme, which generated illicit funds that were then funneled through a legitimate business. Taking Steven’s allegations to be true, the court noted that the funds obtained as a result of James’ alleged fraudulent behavior were either spent on lawful expenses or were illicitly sheltered from taxation and this was not money laundering. The court further noted that Steven failed to allege a legitimate business that was used to scrub the fraudulently obtained money into ostensibly legitimate funds.

The case is No. 14-4854 ADM/LIB

Attorneys: DeWayne A. Johnston (Johnston Law Office) for Steven Nelson. Kip M. Kaler (Kaler Doeling PLLP) for James Nelson. Todd E. Zimmerman, (Fredrikson & Byron PA) for Chris Feller, Randy Skjerven, and AgCountry Farm Credit Services, ACA.

Companies: J&S Nelson Farms, LLP; AgCountry Farm Credit Services, ACA

Cases: RICO MinnesotaNews