Antitrust Law Daily Wrap Up, RICO—DKan: Borrower Fails to Allege RICO Predicate Acts, Pattern of Racketeering Activity Against Lender, (Apr 23, 2013)

By Tobias J. Gillett, J.D., LL.M.

A borrower failed to state RICO claims against a mortgage lender over the lender’s alleged fraudulent statements made during the negotiation, modification, and performance of two loans, because it failed to adequately allege predicate acts of fraud and extortion and a pattern of racketeering activity, the federal district court in Kansas City, Kansas has ruled (Olathe/Santa Fe Partnership v. Doull, April 19, 2013, Murguia, C.).

In 2004 and 2006, Olathe/Santa Fe Partnership executed real property mortgage loan agreements with Cornerstone Bank. In 2010, Cornerstone filed a petition in state court to foreclose on the 2006 loan, and in 2012 it filed a petition to foreclose on the 2004 loan. Olathe/Santa Fe filed counterclaims for fraud and breach of contract, but the state court entered judgment in favor of Cornerstone on all claims and counterclaims.

In 2012, Olathe/Santa Fe filed the present lawsuit in federal court, alleging violations of the RICO Act, as well as a variety of state law claims. Cornerstone filed a motion to dismiss.

RICO Claims

The court initially explained that a plaintiff must allege "(1) investment in, control of, or conduct of (2) an enterprise (3) through a pattern (4) of racketeering activity" to state a claim under the RICO Act. A "pattern racketeering activity" requires at least two predicate acts committed within a ten-year period.

Predicate acts. The court concluded that Olathe/Santa Fe failed to sufficiently allege two predicate acts. Olathe/Santa Fe’s fraud claims required more than allegations that Cornerstone sent false statements through the mail or over the wires. Moreover, its claims that Cornerstone defrauded other entities and individuals did not "indicate the time, place, and content of the misrepresentations, the person who made the false statement, or what acts resulted from the false statements."

Further, Olathe/Santa Fe did not adequately allege extortion claims under the Hobbs Act, which defines extortion as "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right." Allegations that Cornerstone wanted Olathe/Santa Fe to negotiate and provide more collateral before Cornerstone advanced additional funds did not state a claim under the Hobbs Act, in the court’s view.

Pattern of racketeering activity. The court also determined that Olathe/Santa Fe did not sufficiently allege a pattern of racketeering activity. The court explained that a RICO plaintiff must "show (1) a relationship between the predicate acts, and (2) the threat of continuing activity," which requires either "a series of related predicates extending over a substantial period of time" or "a clear threat of future criminal conduct related to past criminal conduct."

Here, Olathe/Santa Fe had not alleged any dates concerning Cornerstone’s alleged fraud on other entities and individuals. Moreover, Olathe/Santa Fe failed to demonstrate a "threat of continuing activity" because it merely "alleged a closed-ended series of predicate acts (mail fraud, wire fraud, extortion) constituting a single scheme (reduce the number of real estate loans) to accomplish a discrete goal (increase liquidity) directed at a finite group of individuals with no potential to extend to other persons or entities."

The court declined to grant Olathe/Santa Fe leave to amend its claim, noting that it did not give the court adequate notice of the basis for the proposed amendments and that it had not provided any additional information that would justify an amendment. The court also declined to exercise its supplemental jurisdiction over Olathe/Santa Fe’s state law claims.

The case is No. 12-2374-CM.

Attorneys: David Lewis Ballew (Duggan, Shadwick Doerr & Kurlbaum, PC) for Olathe-Santa Fe Partnership. Austin B. Hayden (Cohen McNeile & Pappas PC) for John K. Doull.

Companies: Olathe/Santa Fe Partnership; Cornerstone Bank

Cases: RICO KansasNews