Antitrust Law Daily Wrap Up, RICO—N.D. Ind.: RICO claims over alleged toxic waste dumping fail against seat manufacturer due to lack of enterprise, pattern of racketeering activity, (Jun 27, 2013)

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

Residents in the area of a seat manufacturer that allegedly engaged in illegal dumping of hazardous wastes and then committed fraud and perjury to cover it up failed to state RICO claims against the manufacturer and related entities and individuals, because they did not adequately allege a RICO enterprise or pattern of racketeering activity, the federal district court in South Bend, Indiana has ruled (Browning v. Flexsteel Industries, Inc., June 25, 2013, DeGuilio, J.).

Dygert Seating, Inc. (DSI) operated as a seat manufacturer from 1983 until 1997. During that time, DSI allegedly dumped industrial solvents into the ground, in violation of the Resource Recovery and Conservation Act (RCRA). Dygert later went bankrupt, and Flexsteel Industries, Inc. purchased its assets.

After the acquisition, Flexsteel discovered barrels of solvents and waste oil on a DSI property that did not have an Environmental Protection Agency identification number. To avoid an RCRA inspection and waste generator fees, Flexsteel allegedly transported the waste to a site that formerly did have an EPA number. DSI’s principal falsely testified to the Indiana Department of Environmental Management (IDEM) that the waste had been generated at the second site, and the EPA number was reissued.

Flexsteel allegedly continued the illegal dumping of hazardous materials until 2005, when it sold the property to Fred Lands, without informing him of the environmental contamination. Flexsteel provided an environmental site assessment clearing the site that had been obtained through Flexsteel’s false statements to the preparer of the assessment that it had no knowledge of any environmental conditions on the site. In 2007, nearby residents discovered contamination in their tap water, and in 2008 EPA and IDEM found a plume of groundwater contamination originating at the site.

Nonetheless, former DSI and Flexsteel employees claimed that they knew of no contaminants used on the property. The nearby residents filed suit in state court against Flexsteel and certain former DSI and Flexsteel employees, bringing a variety of common law and statutory claims, and in May 2011 filed a federal lawsuit under the RCRA, as well as a diversity action by Fred Lands under the Indiana Responsible Property Transfer Law. The defendants allegedly committed various acts of perjury in connection with the state court proceeding. In May 2012, the plaintiffs filed an amended complaint asserting RICO claims against Flexsteel, DSI, and certain of their former employees. The court’s present order addressed the RICO claims.

Enterprise. The court explained that a RICO plaintiff must allege that the defendant “(1) conducted (2) an enterprise (3) through a pattern (4) of racketeering activity. A RICO enterprise “includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” An association-in-fact is “a group of people associated together for a common purpose of engaging in a course of conduct,” and “is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.” In 2009, in Boyle v. United States, 556 U.S. 938, the Supreme Court clarified that an association-in-fact need not be a business-like entity, but must have some “structure,” including “at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.”

The complaint alleged two distinct enterprises, one the legal entity DSI and the other an informal “association-in-fact” formed by DSI, Flexsteel, and the former employees. The court observed that the DSI enterprise “need not detain us long” because, even assuming its conduct could qualify as predicate acts, “the alleged pattern of racketeering activity with respect to the DSI enterprise involved a single scheme involving three separate mailings and lasting barely one year,” clearly insufficient to establish a “pattern of racketeering activity.”

With respect to the informal association-in-fact, the court observed “[s]ince at least 2002, by which time DSI was dissolved and all of the individual defendant ‘associates’ had ceased any employment with Flexsteel, the only coherence to the ‘association’ is that its associates have allegedly falsely denied (in ways that perhaps constitute mail and wire fraud and obstruction of justice) their own responsibility for the environmental contamination at the site.” The defendants claimed that the plaintiffs had failed to allege an enterprise that was distinct from the pattern of racketeering activity, while the plaintiffs argued “that Boyle had done away with any such distinctness requirement.”

The court found that Boyle had not eliminated the enterprise requirement. The court observed that “Boyle’s two important holdings are (1) that although ‘enterprise’ and ‘pattern’ are distinct elements, it would be incorrect to imply to a jury that the evidence establishing a pattern of racketeering activity can never, without more, prove the existence of an enterprise; and (2) that although an enterprise must have some distinct structure, it may have any type of structure, and courts may not impose additional structural limitations beyond the basic three identified in the Court’s opinion.” According to the court, Boyle was only meant to “refuse to force RICO enterprises to conform to any particular preconceived notion of structure,” not to “significantly (or completely) dissolve the distinction between an enterprise and a pattern.”

From an analysis of Boyle, the court extracted three structural requirements RICO enterprises must meet. The enterprise “must entail some form of collaborative, coordinated effort to accomplish a truly common end that could not be as effectively pursued individually”; must involve relationships among those associated with the enterprise “sufficient to demonstrate that the various associates are capable of functioning in a coordinated manner, as a continuing unit, to achieve the common purpose”; and those relationships must “persist long enough to accomplish the ‘purpose’ of the enterprise.”

Applying these criteria to the facts in the present case, the court found it was “impossible from the complaint to identify any ‘continuing unit’ after 2002, at the latest.” The complaint failed to allege how any of the enterprise’s associates “collaborated in any of the predicate acts allegedly committed after the initial 1997 scheme to illegally dispose of waste.” There was no allegation that anyone other than Flexsteel participated in alleged mail fraud in connection with the sale of the property to Fred Lands or that any of the associates collaborated with each other in falsely denying the use of contaminants to the EPA.

Moreover, some of the alleged purposes of the enterprise appeared to be those of Flexsteel alone, since DSI was defunct by 1997, and the individual defendants would not be liable for remediation costs. The complaint did not explain how other purposes, such as concealing the evidence of environmental crimes, were common interests rather than merely parallel ones. The only predicate acts alleged were individuals denying their own culpability, not covering up each other’s crimes.

Nor did the complaint allege that the defendants had maintained any interpersonal relationships since 2002, and those alleged interpersonal relationships prior to 2002 only consisted of their joint employment at Flexsteel, not their work toward a common purpose.

Although Boyle did hold “that an enterprise could be proved from evidence of a pattern of racketeering activity,” the court observed that “Boyle also makes clear that the alleged existence of a pattern does not necessarily establish the enterprise element.” In the present case, without evidence of ongoing relationships or coordination of activities, the complaint did not adequately allege an enterprise, in the court’s view.

Pattern of racketeering activity. The court proceeded to discuss the “pattern of racketeering” element of the RICO claim, explaining that a plaintiff must allege at least two predicate acts of racketeering activity occurring within a ten-year period, and that the acts “must amount to or pose a threat of continued criminal activity.” The continuity may be closed-ended, a completed scheme carrying an implicit threat of future harm, or open-ended, a scheme that by its nature threatens repetition of future harm, and the plaintiff must allege that the racketeering activity caused an injury to the plaintiff’s business or property.

The court found that false statements to IDEM in 1997 and 1998 appeared to constitute mail fraud, as the allegations could make out a scheme that the defendants used the mails to defraud IDEM of waste generator fees by means of materially false representations. However, alleged fraud on the consultant that prepared environmental assessments for the site did not constitute mail fraud because they did not deprive anyone of money or property.

The 1997 and 1998 mailings did not constitute a pattern of racketeering activity because “a one year pattern is inherently insufficient to state a RICO claim” and because the complaint “explicitly presents a distinct and non-reoccurring scheme with a built-in termination point and provides no indication that the perpetrators have engaged or will engage in similar misconduct,” in the court’s view. Flexsteel’s mailing of the false environmental assessment to Fred Lands also did not constitute mail fraud because Flexsteel did not appear to be conducting the affairs of the enterprise, rather than its own affairs.

The alleged perjury and fraud on federal and state regulators also did not form a pattern of racketeering activity, according to the court. Although obstruction of state court proceedings is not a RICO predicate act, the plaintiffs claimed that the conduct was aimed at obstructing the federal court proceedings. The false statements to the EPA and IDEM were not obstruction of justice, but could be mail fraud because they allegedly led the EPA to spend money to connect residents to municipal water, money that would otherwise have been spent by Flexsteel.

However, even if that conduct could constitute predicate acts, the acts “merely represent[ed] a distinct and non-reoccurring scheme with a built-in termination point,” and there was “no indication that the defendants have or will engage in similar cover-ups of other crimes.” The acts were “simply attempts to cover up and avoid liability for environmental crimes (which are not themselves RICO predicate acts).” Although acts of concealment could be “integral to the underlying criminal scheme” in some cases, and thus cause the harm as much as the non-predicate acts, in this case the environmental contamination caused the harm. The concealment did not allow the dumping to continue, and therefore the conduct “did nothing to extend the duration of the underlying environmental scheme,” in the court’s view.

Since the plaintiffs had failed to establish an enterprise or a pattern of racketeering activity for their substantive RICO claims, they also failed to state a RICO conspiracy claim, according to the court.

The case is No. 3:11-CV-480 JD.

Attorneys: Melissa A. Gardner (Taft Stettinius & Hollister LLP) for Christopher Browning. Brian E. Casey (Barnes & Thornburg LLP) for Flexsteel Industries Inc.

Companies: Flexsteel Industries, Inc.

Cases: RICO IndianaNews