Antitrust Law Daily Wrap Up, RICO—N.D. Ill.: RICO and state law claims dismissed against attorneys who assisted RICO defendants with litigation, (Sep 30, 2015)

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

A motion to dismiss claims that certain attorneys, that had been retained to represent several corporate entities, joined an ongoing Racketeer Influenced and Corrupt Organizations Act (RICO) conspiracy against those entities, was dismissed by the federal district court in Chicago. In dismissing the claims, the court found that the attorneys did not know about the RICO conspiracy and, even if they had intended to facilitate the conspiracy, the plaintiffs did not sufficiently allege an agreement by them to join the conspiracy. The court also declined to exercise supplemental jurisdiction over the state law claims that were alleged and, therefore, dismissed those claims as well (Krakow Business Park SP.z.o.o v. Locke Lord, LLP, September 28, 2015, Shah, M.).

Background. Adam Sweich (AS), Richard Sweich (RS), Derek Lewicki (DL), Andrew Kozlowski (AK) and Jan Domanus (JD) were primary shareholders in Krakow Business Park (KBP), a Polish real estate development company, which was formed in 1997, and KBP’s wholly-owned subsidiaries. In August of 2008, AK and JD filed an action against AS, RS, DL (collectively, “defendants”), and several other defendants, that alleged violations of RICO and state law. KBP and its subsidiaries were later added as nominal defendants. Approximately $413 million in damages were assessed against AS, RS, and DL. Following an affirmation of that award by the Seventh Circuit court of appeals, the plaintiffs dismissed all direct claims against the non-defaulting defendants.

By April of 2014, KBP had entered bankruptcy proceedings and a trustee had assumed control over the corporation and its wholly-owned subsidiaries. The companies were then able to pursue, on their own behalf, claims formerly designated as “derivative.” The corporations were realigned as plaintiffs and the plaintiffs, which now included the corporations, JD, and AK, asserted claims against attorneys John Dienner, Martin Jaszuzuk, Jay Safer, and Daniel Schlessinger that they had joined the defendants’ RICO conspiracy.

The plaintiffs specifically alleged that Dienner, an attorney for Kubasiak, Fylstra, Thorpe & Rotunno, PC. (KFTR): (1) was recruited to represent KBP by an attorney at Gordon & Karr that was representing the defendants; (2) performed his duties, during his engagement as KBP’s attorney, at the direction of the defendants and their counsel; and (3) participated in a fraudulent billing scheme, devised by the defendants and their counsel, which caused KBP to pay legal fees to the defendants’ counsel.

The plaintiffs specifically alleged that Jaszuzuk, Safer, and Schlessinger, attorneys for Locke Lord, LLP (Locke Lord attorneys) who were initially retained to handle the “common interest” shared by KBP and defendants but later agreed to exclusively represent the plaintiffs, undertook a series of in appropriate actions that harmed the plaintiffs which included: (1) sending a letter to AK’s employer in an effort to intimidate AK into dropping the suit against the defendants; (2) opposing the production of certain records during discovery; (3) obtaining background reports on AK, JD and JD’s wife in order to assist AS in his criminal case; (4) filing a cross-claim on KBP’s behalf that was really a counterclaim by the defendants; and (5) opposing a temporary restraining order enjoining AS from voting his corporate shares to issue new KBP stock. JD and AK was granted their motion to disqualify Locke Lord. However, the Lock Lord attorneys continued to communicate with defendants and their counsel.

The plaintiffs filed a complaint against Dienner, and supplemental complaint against Locke Lord, LLP and the Locke Lord attorneys, that alleged: (1) a RICO conspiracy claim; and (2) state-law claims for civil conspiracy, legal malpractice, breach of fiduciary duty, aiding-and-abetting a breach of fiduciary duty, and aiding-and-abetting fraud.

Estoppel and Preclusion. The Lock Lord defendants argued that the plaintiffs were estopped or otherwise precluded from bring their RICO, civil-conspiracy and aiding-and-abetting claims because: (1) the plaintiffs had elected to proceed with a damages hearing against the defaulters, on what was formerly the direct claims, and had obtained a damages award on those claims; and (2) therefore, the plaintiffs could not assert those same claims against the Locke Lord attorneys. The court agreed, in part, after finding that AK and JD promised to dismiss the claims against the remaining defendants once a final and enforceable judgment had been entered and, having made such a promise, they were judicially estopped from withdrawing it.

The court, however, found that while the plaintiffs were estopped from pursuing, against any defendant, any direct claim for which damages may have already been assessed, there could be a new direct claim for which damages may not have yet been determined. The court further noted that AK and JD only promised to dismiss all of their direct claims against the non-defaulters. Consequently, there were not estopped from pursuing derivative claims against the Locke Lord attorneys.

Based on this analysis, the court determined that AK and JD were not estopped or precluded from pursuing derivative claims, or new direct claims, against Dienner or KFTR.

Racketeer Influenced and Corrupt Organizations Act (RICO). The plaintiffs claimed that Locke Lorde attorneys joined the defendants’ RICO conspiracy, which was carried out through a series of predicate acts that included mail and wire fraud. The basis for this claim was that the Locke Lord attorneys knowingly facilitated the racketeering activities of the defendants by agreeing to: (1) get the defendants “off the hook” for their alleged misdeeds, thus allowing them to keep what they had stolen and to maintain control of the companies; and (2) extract payment for the Locke Lord attorney’s legal services (in reality performed for the defendants) from KBP entities.

The court noted that in order to participate in the defendants’ racketeering activities it was necessary that the Locke Lord attorneys knew about the racketeering activities. The plaintiffs argued that Locke Lord attorneys knew about the defendants’ racketeering activities from allegations in the complaint, a document authored by a Polish prosecutor who had criminally prosecuted one of the defendants, and a large volume of discovery documents sent to them by the plaintiffs.

The court found that the plaintiffs had pleaded enough to conclude that the Locke Lorde attorneys at least suspected that some of the plaintiffs’ allegations were true. However, it also noted that suspicion of wrong doing, by itself, did not amount to knowledge of an ongoing RICO conspiracy.

The plaintiffs argued that if the Locke Lord attorneys did not know about the defendants’ racketeering, it was because they deliberately closed their eyes to the truth. The basis for this allegation was an email between the Locke Lord attorneys which summarized their approach as “ignoring what the defendants did or did not do and focusing on what the plaintiffs did and what they knew.” The court, however, determined that the inference of “willful blindness” was not permissible and that their complaint did not adequately allege the requisite knowledge for the Locke Lord attorneys to be liable for a RICO conspiracy.

The court found that, even if the Locke Lord attorneys did know about the racketeering, the plaintiffs did not allege an agreement to join their RICO conspiracy. The Locke Lord attorneys’ fraud was that they concealed that they were assisting the defendants in the litigation and that they asserted several misstatements of fact on the defendants’ behalf during litigation. However, the court determined that merely providing legal assistance to defendants in a RICO case was insufficient to show that they joined the RICO conspiracy.

The court also noted that one cannot become a member of a RICO conspiracy unless one has agreed to participate in the affairs of an enterprise through a pattern of racketeering activity. The court determined that the Locke Lord attorneys did not engage in a pattern of racketeering activity because the RICO predicate acts engaged in by the defendants were different in purpose and kind that the acts in which Locke Lord attorneys allegedly engaged in by covertly representing the defendants’ interest.

The court determined that, at most, the plaintiffs pleaded a secret intent on the part of the Locke Lord attorneys to enable the defendants’ theft. It further determined that “intent” was not the same as “agreement” which is required to prove a conspiracy.

In considering the RICO claims against Dienner and KFTR, the court determined that the plaintiffs’ complaint suffered from much of the same defects as the complaint against the Locke Lord attorneys. Because it determined that the plaintiffs’ allegations were insufficient to conclude that there was a conspiracy between Dienner and the defendants, the court also dismissed the RICO claim against Dienner and KFTR.

State Law Claims. Because it dismissed the RICO claims against the Locke Lord attorneys, Dienner and KFTR, the court declined to exercise supplemental jurisdiction over the plaintiffs’ state-law claims. Therefore, it dismissed those claims.

The case number is No. 08 CV 4922.

Attorneys: Adam N. Hirsch (Robinson Curley & Clayton, PC) for Jan Domanus, Krakow Business Park Sp. Z. O.O, KBP-2 SP.Z.O.O., KBP-3 SP.Z.O.O., KBP-5 SP.Z.O.O., and KBP-6 SP.Z.O.O. Lucas M. Fuksa (Fuksa Khorshid LLC) for Derek Lewicki. Edward W. Feldman (Miller Shakman & Beem LLP) for Locke Lord, LLP. James R. Figliulo (Figliulo & Silverman) for Kubasiak, Fylstra, Thorpe & Rotunno, PC.

Companies: Krakow Business Park Sp. z o.o; KBP-2 SP.Z.O.O.; KBP-3 SP.Z.O.O.; KBP-5 SP.Z.O.O.; KBP-6 SP.Z.O.O.; Spectrum Company, Ltd.; Orchard Meadows Homes, LLC; Orchard Meadows, LLC; Polcon Construction Corp.; Saxelby Enterprises, Ltd.; Protorius, Ltd.; Lake Ridge LLC; Locke Lord, LLP; Kubasiak, Fylstra, Thorpe & Rotunno, PC

Cases: RICO IllinoisNews