Antitrust Law Daily Wrap Up, RICO—N.D. Ill.: Chicago building commission, contractor may be liable for RICO conspiracy, (Jun 29, 2016)

By Mark Engstrom, J.D.

Geothermal consulting company DT Boring could pursue RICO conspiracy claims against three defendants that allegedly perpetrated a scheme to defraud downstream subcontractors that provided services for the construction of a Chicago police station, the federal district court in Chicago has ruled (DT Boring, Inc. v. The Chicago Public Building Commission, June 28, 2016, Gettleman, R.). The plaintiff could not, however, proceed with two additional RICO claims (claims under §1962(b), which prohibited the acquisition or maintenance of a RICO enterprise, and claims under §1962(b), which prohibited the participation in a RICO enterprise through a pattern of racketeering). Dismissal of the RICO claims was granted in part and denied in part.

Lawsuit. DT Boring sued The Chicago Public Building Commission (PBC), Harbour Contractors, Environmental Design International (EDI), and John Dimos for violating the RICO statute. According to DT Boring, all three defendants knew about the existence of underground asbestos and concrete obstructions on the project site—before PBC had prepared any bid documents for the project—but concealed the condition of the site so subcontractors would underestimate the cost of completing their work.

DT Boring further alleged that the defendants had falsely represented that they would pay for the extra work and down time that was caused by the obstructions. Further, neither Harbour nor PBC had paid DT Boring for the extra work that it had performed in conjunction with the undisclosed obstructions and asbestos-related downtime, the plaintiff alleged.

RICO Scheme. DT Boring alleged that PBC had supervised and controlled a RICO enterprise that consisted of a group of pre-approved "second-tier" general contractors (such as Harbour), "third-tier" subcontractors (such as Optimal Energy), and consultants (such as EDI). According to DT Boring, the goal of the enterprise was to benefit PBC—through fraud and extortion—by constructing or renovating public buildings at or below their actual construction cost, and by enriching the second-tier and third-tier subcontractors at the expense of the contractors that were furthest downstream.

More specifically, the plaintiff alleged that the general contractor had extorted funds and performance from the lowest-tier subcontractors by: (1) refusing to process change orders for approved work that was performed outside the scope of the contracts, thereby allowing PBC to benefit from free work and materials; (2) "trumping up" phony charges for the subcontractor’s purportedly defective work so the general contractor could withhold payment on those charges; (3) refusing to pay the subcontractor; and agreeing to pay retainage, change orders, and amounts due, but only if the subcontractor agreed to a buyout (i.e., a reduction in the amount that was owed to the subcontractor).

Collateral sources of recovery. The defendants argued that the RICO claims should be dismissed because DT Boring failed to exhaust all other sources of recovery. According to the defendants, a plaintiff lacked standing to bring a RICO claim if all other means of recovery were not exhausted. Without exhausting all other sources of recovery, the defendants argued, a plaintiff’s damages could not be "clear and definite."

According to the defendants, DT Boring failed to pursue a mechanic’s lien claim and a breach of contract claim—against Optimal and Harbour—and therefore failed to exhaust its collateral sources of recovery. For that reason, the defendants concluded that DT Boring lacked damages that were sufficiently concrete to confer RICO standing.

The court disagreed. A plaintiff lacked RICO standing only if the plaintiff sought repayment on the same debt through two different sources, and DT Boring was seeking a single source of recovery. Further, because DT Boring was not a secured creditor, its RICO damages were not "netted against recovery obtained from collateral." Finally, no parallel legal proceedings made the sought-after damages indefinite. With respect to issue of collateral sources of recovery, dismissal was not warranted.

Statute of limitations. Harbour argued that the RICO claims were barred by the four-year statute of limitations for civil RICO claims. More specifically, Harbour argued that the limitations period commenced on numerous dates. The earliest date was April 6, 2011, when DT Boring received the final site plans for the project; the latest date was November 18, 2011, when Harbour was removed from the job site. Harbour, however, did not explain—and the court could not discern—how the plaintiff would have known of its injury on either date.

Significantly, the complaint did not allege that the racketeering scheme was limited to the concealment of site’s condition, which caused subcontractors to "low-bid" the cost of their work. Instead, the complaint alleged that the defendants had made "continued false representations" that they would pay for the extra work and down-time that was caused by the obstructions.

In light of the defendants’ alleged promises to pay, the discovery of the hazards and obstructions at issue would not have been sufficient, by itself, to put DT Boring on notice that it had been injured by Harbour. Similarly, because Harbour and the other defendants continued to reassure DT Boring that the company would be paid for work that was done in conjunction with the obstructions—and did so even after the date that DT Boring was terminated from the project—the court could not conclude that the plaintiff knew about its injury on November 18, 2011, when it was terminated from the project.

Pleading with particularity. Harbour argued that the RICO claims were deficient because they failed to plead fraud with particularity, as required by Rule 9(b) of the Federal Rules of Civil Procedure. The court noted that Rule 9(b) required plaintiffs to plead the "who, what, when, where, and how" of the alleged fraud.

In the court’s view, the plaintiff’s entire RICO theory was based on Harbour’s participation in a scheme to defraud DT Boring and other lower-tier subcontractors. More specifically, the complaint alleged that Harbour and the other defendants knew about the asbestos hazards and concrete obstructions before the plaintiff even began its work. In addition, the defendants allegedly knew that the obstructions would require additional work by DT Boring. Finally, the plaintiff alleged that Harbour had induced its extra work by making false representations that Harbour or PBC would pay for the work.

DT Boring did not need to allege that Harbour had made false representations in a mail or wire communication, the court ruled. The gravamen of the mail and wire fraud offense was the scheme to defraud, it explained, and any mailing that was incident to an essential part of the scheme satisfied the mailing element, "even if the mailing itself contained no false information." Similarly, a plaintiff that asserted a RICO claim predicated on mail fraud did not need to plead or prove that it had relied on the defendant’s alleged misrepresentations. For those reasons, the court denied Harbour’s motion to dismiss for failure to comply with Rule 9(b).

Enterprise. DT Boring sufficiently alleged an association-in-fact enterprise. Specifically, it asserted that PBC supervised and controlled an enterprise that consisted of "second-tier" and "third-tier" contractors, plus consultants. In doing so, the plaintiff identified an enterprise that was distinct from the culpable RICO defendants.

Harbour conceded that a common purpose was alleged, but it tried to characterize that purpose as the construction of buildings for the least amount of money, and thereby allowing the contractors to realize a profit. According to Harbour, that goal was insufficient to establish an enterprise because "every building owner and every general contractor for every construction project" had the same purpose.

Harbour failed, however, to acknowledge that DT Boring had alleged that the enterprise’s goal was accomplished through fraud and extortion. In addition, the complaint plausibly alleged the requisite relationships between the various RICO actors. Finally, the complaint included factual allegations that suggested that the defendants and other RICO associates had pursued the enterprise’s goal from 2008 to 2012, and therefore pleaded sufficient longevity. According to the court, the plaintiff’s allegations plausibly identified a RICO enterprise.

Pattern of racketeering. DT Boring could not maintain individual claims against Harbour or EDI—under RICO §§1962(b) and 1962(c)—because it failed to identify at least two instances of mail or wire fraud by either defendant.

The plaintiff’s complaint did not identify a single mailing or wire communication that was sent by EDI, the court explained, and thus failed to allege that EDI had engaged in a pattern of racketeering for the purpose of individual liability under §1962(b). Nor did the complaint plausibly allege that EDI had "caused the mails to be used." Finally because DT Boring did not allege that EDI had committed a predicate act of racketeering, it failed to sufficiently allege that its §1962(b) damages were proximately caused by EDI.

Because DT Boring failed to sufficiently allege at least two predicate acts by Harbour, it failed to plead a pattern of racketeering for its §§1962(b) and 1962(c) claims against Harbour. Although the plaintiff’s complaint identified a September 14, 2011 email that was sent by Harbour in furtherance of the alleged scheme to defraud, the complaint lacked allegations of a second predicate act.

The plaintiff argued that three other emails from Harbour constituted predicate acts, but it failed to plausibly allege how those emails were incident to an essential part of the alleged scheme, and not simply "normal business communications" about the construction project. For all of those reasons, DT Boring failed to state a valid claim for relief under RICO §§1962(b) and 1962(c).

Conspiracy. To state a conspiracy claim under §1962(d), plaintiffs were required to allege that a defendant had agreed: (1) to maintain an interest in, or control of, an enterprise—or to participate in the affairs of an enterprise—through a pattern of racketeering activity and (2) that someone would commit at least two predicate acts to accomplish those goals. In this case, the court found that both of those allegations were sufficiently pleaded.

Proximate cause. Harbour and EDI argued that the RICO claims should be dismissed because the plaintiff’s complaint failed to adequately plead a conspiracy that had proximately caused the plaintiff’s damages. Although DT Boring had sufficiently alleged just one predicate act by Harbour and none by EDI, it nevertheless alleged numerous instances of mail and wire fraud by PBC, a co-conspirator in the alleged enterprise.

Because the predicate acts that PBC had allegedly committed could serve as the proximate cause of the plaintiff’s injuries for the purpose of a conspiracy claim under §1962(d), and because the plaintiff’s allegations were sufficient to plausibly suggest that the alleged conspiracy had led to plaintiff’s injuries, the court refused to dismiss the conspiracy claim.

The case is No. 15 C 11222.

Attorneys: Cristofer E. Lord (Lord Law Firm, LLC) and Bruce M. Rose (Law Office of Bruce Rose) for DT Boring, Inc. Tobin Marais Richter (Neal & Leroy, LLC) for The Chicago Public Building Commission. Charles Briton Lewis (Duane Morris LLP) for Harbour Contractors, Inc. Elizabeth D. Sharp (Law Offices of Elizabeth D. Sharp, PC) for Environmental Design International, Inc.

Companies: DT Boring, Inc.; The Chicago Public Building Commission; Harbour Contractors, Inc.; Environmental Design International, Inc.

Cases: RICO IllinoisNews