Antitrust Law Daily Wrap Up, RICO—EDNY: Gas Stations Handed $13 Million Damages Judgment for Conspiring to Redirect Funds Earmarked for Loan Repayment to Principals, (Jan 17, 2013)

By E. Darius Sturmer, J.D.

A group of retail gas stations in New York and New Jersey affiliated through common ownership with wholesale gas distributor National Gasoline, Inc. (National) was ordered by the federal district court in Brooklyn to pay over $13 million in damages to Wells Fargo Bank, N.A. for violating federal RICO law by conspiring to fraudulently induce Wells Fargo to enter into an agreement with National that established a $6.5 million revolving line of credit (Wells Fargo Bank, N.A. v. National Gasoline, Inc., January 16, 2013, Reyes, R.).

Wells Fargo alleged that National, its principals, and the gas stations illegally conspired by failing to disclose the affiliation among them and by repeatedly including ineligible amounts the gas stations owed National in monthly accounts receivable. According to Wells Fargo, the defendants entered into the scheme to use the fraudulently obtained line of credit in order to buy gasoline that was then sold to the gas stations. However, they did so never intending for the gas stations to pay it back into National’s collection account, as the agreement with Wells Fargo stipulated; instead, the proceeds were transferred among the affiliates to compensate the individual principals. In addition, it was alleged, National and one of its principals refused to remit to Wells Fargo nearly $1.5 million in paid accounts receivable in accordance with the loan agreement.

The distributor and its principals also: withdrew proceeds from the collection account without authorization, using the funds to pay other creditors and third parties before Wells Fargo; purportedly wrote and deposited false checks into the collection account, thereby increasing its value to draw more from the loan; and deposited collections of collateral into other bank accounts the principals owned or controlled.

The gas stations were found liable for RICO violations, as well as for civil conspiracy to defraud, on consent and by default. Accordingly, they were each jointly and severally responsible for the full amount of damages awarded for each claim—$13,139,559.75 and $4,379,853.25, respectively. They were also required to pay $353,786.70 for attorney fees and costs related to the RICO claim.

Wells Fargo’s allegations, when taken as true, established that the “defaulting” defendant gas stations, acting in concert with other named defendants, constituted a RICO enterprise, in the court’s view. They had conspired with National and the other defendants to profit from loan proceeds fraudulently drawn from Wells Fargo. The enterprise affected interstate commerce and engaged in predicate acts of mail and wire fraud as part of the scheme to defraud the bank. The fund transfers were related by virtue of common participants, common targets, and common purposes. Finally, Wells Fargo sufficiently alleged that it was harmed by the enterprise in that it was deprived of its collateral and the unpaid balance of the loan, the court reasoned.

The “consenting” defendants had admitted liability, agreeing to final judgment against them in whatever amount was determined at the damages hearing.

The court arrived at its damages figures by evaluating evidence submitted at the damages hearing that included the outstanding balance of the loan, related interest charges and fees, and the amount of wire transfers from the collection account to various defendants in the action. Although the court exercised its discretion to not award pre-judgment interest, given that Wells Fargo’s trebled damages award “amount[ed] to a net recovery,” it noted that the bank was entitled to post-judgment interest from all of the consenting and defaulting defendants.

The case is 10-CV-1762 (RER).

Attorneys: Gordon S. Young (Leitess Friedberg PC) for Wells Fargo Bank, N.A. N. Richard Wool for National Gasoline, Inc.

Companies: Wells Fargo Bank, N.A.; National Gasoline, Inc.

Cases: RICO NewYorkNews