Antitrust Law Daily Wrap Up, RICO—N.D. Ill.: Corporate president could not pursue RICO claims against ousters, (Mar 17, 2017)

By Mark Engstrom, J.D.

The founder and ousted president of a company that operated a tavern in Kane County, Illinois, failed to allege a racketeering enterprise, a viable predicate act, or a pattern of racketeering in his RICO claim against the company and four individuals who allegedly conspired to frame him for sexual assault as a pretext for ousting him, the federal district court in Chicago has ruled. Because the connection between the ouster and the defendant who had accused the plaintiff of sexual assault was insufficient to support an association-in-fact enterprise or the relationship element of a pattern of racketeering, and because the predicate acts alleged—embezzling corporate funds, falsifying testimony, initiating and continuing false charges, and conducting business in a manner that was specifically designed to devalue the plaintiff’s stock—were insufficiently continuous and absent from the statutory list of valid predicate offenses, the RICO claim was dismissed (Hudgens v. Pratha Entertainment, Inc., March 14, 2017, St. Eve, A.).

In 2004, plaintiff Greg Hudgens and a college roommate founded Pratha Entertainment, a company that operated the Martini Room tavern in Kane County, Illinois. A year later, Hudgens became the sole owner of Pratha. Between August 2006 and June 2012, however, Hudgens sold 50.5 percent of his Pratha shares to defendants Urszula Borodzinska, Mark Debowski, and William Soulier (collectively, the "Pratha Defendants").

On June 18, 2012, the Pratha Defendants held a shareholder’s meeting and ousted Hudgens as President. Hudgens sued the Pratha defendants, Pratha Entertainment, and Ramona Burns for violations of the federal RICO statute and Illinois law. According to Hudgens, the Pratha Defendants had conspired with Burns to frame him for sexual assault—as a pretext for the ouster—after Hudgnes had discovered that the Pratha Defendants were misappropriating company funds.

Enterprise. The allegation by Hudgens that the defendants had formed an enterprise "for the purpose of harming [his] business interests" was insufficient to plead the existence of an association in fact. Although the Pratha Defendants might have satisfied the enterprise requirement independently—through their involvement with Pratha and their alleged goal of excluding Hudgens from the corporation and its operations—Hudgens failed to allege any facts to support an association (between Burns and the Pratha Defendants) that had the requisite structural features of a RICO enterprise.

The court acknowledged that Hudgens had "outline[d] in detail" the corporate structure of Pratha, but it found no factual detail regarding: (1) the relationship between Burns and the Pratha Defendants or (2) the "operations and purpose" of their alleged enterprise.

The connection between the Pratha Defendants and Burns was limited to a single telephone conversation between Hudgens and Burns, in which Burns had purportedly informed Hudgens that the Pratha defendants were framing him for rape to remove him from Pratha. That undetailed allegation was insufficient, however, to establish a RICO enterprise.

Ultimately, Hudgens failed to allege any facts about the nature or extent of the defendants’ association or how they functioned as a continuing unit. In addition, he failed to proffer any allegations about the interpersonal relationships between Burns and the Pratha Defendants, or the scope and duration of their purported enterprise.

Instead, Hudgens asserted that the Pratha defendants had embezzled money and excluded him from Pratha, and he failed to provide any factual detail about who took what action and how the other defendants were involved. According to the court, the alleged enterprise had "no hint of a structure," and the alleged interactions between Hudgens and Burns reinforced the notion that Burns had operated independently.

Because Hudgens had identified "different and seemingly independent actors" who had pursued "uncoordinated racketeering actions," his allegations of an association in fact were insufficient to support a RICO claim.

Predicate acts. Hudgens alleged four acts of racketeering: embezzlement of corporate funds, falsifying testimony, initiating and continuing false charges, and conducting business in a manner that was specifically designed to devalue his stock holdings.

With respect to embezzlement, the court noted that the only embezzlement crimes that were valid predicate acts were embezzlements from union funds and pension funds. Although the embezzlement allegations by Hudgens were "extraordinarily vague," the court readily concluded that Hudgens did not allege the embezzlement of union or pension funds. For that reason, embezzlement could not be asserted as a valid predicate act.

Similarly, devaluing stock, falsifying testimony, and initiating false charges were not valid predicate acts. Significantly, courts had specifically found that perjury and malicious prosecution did not qualify as RICO predicate acts. Even if the alleged conduct constituted valid predicate acts, the allegations were "so devoid of factual support" that they failed under the pleading requirements of Rules 8(a) and 9(b) of the Federal Rules of Civil Procedure.

Pattern of racketeering. Because Hudgens failed to allege a valid predicate act, he could not establish a pattern of racketeering. In any event, a pattern was absent—even if valid predicates had been alleged—because the purported acts of racketeering lacked the requisite "relatedness plus continuity."

Relatedness. The court decided that the alleged acts of racketeering were insufficiently related to form a pattern. Hudgens had alleged that the Pratha Defendants had: (1) embezzled money from Pratha and devalued his shares and (2) conspired with Burns to frame him for sexual assault. Those schemes were separate and independent, the court explained, and had different victims, means, and purposes.

Continuity. Because Hudgens was ousted from Pratha after his arrest for battery against Burns, the alleged scheme had reached its "natural end point." Consequently, open-ended continuity did not exist because the scheme was complete. It was also "so specific to the parties and circumstances" that the threat of future repetition was absent. Closed-ended continuity did not exist because the scheme was too short (two to three months), was focused on a single victim (Hudgens), and was directed toward a limited goal (removing Hudgens from Pratha). Ultimately, the alleged scheme was "time-limited" and did not provide the type of "distinct injuries" or "variety of predicate acts" that were required for closed-ended continuity.

The case is No. 16-CV-10684.

Attorneys: Scott W. Kummer (Boyd & Kummer, LLC) for Greg Hudgens. Ronald Anthony Stearney, Jr. (Law Offices of Ronald A. Stearney and Associates) for Pratha Entertainment, Inc.

Companies: Pratha Entertainment, Inc.

Cases: RICO IllinoisNews