Antitrust Law Daily Wrap Up, RICO NEWS: Supreme Court denies review of $36M judgment against fraudulent real-estate enterprise, (Oct 20, 2014)

By Greg Hammond, J.D.

The U.S. Supreme Court will not review a decision by the Sixth Circuit Court of Appeals, affirming that a fraudulent real-estate enterprise—through various sham entities—violated the Racketeer Influenced and Corrupt Organization Act (RICO). The Court denied the petition for certiorari today, which sought to overturn a $36 million judgment (Ross v. Stooksbury, Dkt. 14-226).

Illegal enterprise. The fraudulent real-estate enterprise at issue was controlled by Michael Ross and his late brother. As part of the conspiracy, Ross established Tellico Landing, LLC, to develop and market property called Rarity Bay. The plaintiff, Robert T. Stooksbury, Jr. was a minority partner in Tellico, owning 25 percent of the company. Stooksbury argued that the enterprise: (1) materially misrepresented and falsely advertised the amenities and value of various properties to increase sales; (2) conducted fraudulent transactions and insider deals to inflate property values; and (3) co-mingled and converted company funds for personal use and to facilitate the enterprise. In addition, Stooksbury asserted that Tellico was a sham entity, an alter ego of Ross; that the RICO scheme caused him to unknowingly contribute capital to the criminal enterprise; and that he suffered losses from the sales of property that were not disclosed to him, a crash in property values, and conversion of his funds and profits by the Ross defendants for personal use or to further the enterprise. The trial court awarded default judgment in favor of Stooksbury.

Appellate review. The appellate court affirmed the lower court’s decision, finding that RICO standing is not jurisdictional, and that the lower court did not abuse its discretion in finding that the Ross defendants’ 12(b)(7) motion was untimely. In addition, the appellate court found that Stooksbury adequately alleged direct injury to establish RICO standing, as Stooksbury sufficiently demonstrated that Ross used Tellico as his alter ego to further the criminal enterprise of materially misrepresenting and artificially inflating property values, and caused Stooksbury to unknowingly contribute capital and resources to the enterprise’s scheme, resulting in the misappropriation of his funds and profits.

Petition for certiorari. In his petition for certiorari, Ross argued that the Sixth Circuit’s finding that RICO standing is non-jurisdictional under Article III conflicts with the Seventh Circuit’s opinion on the same question. In addition, Ross asserted that the Sixth Circuit’s decision misconstrues RICO law, which precludes a minority shareholder in a limited liability company from asserting a civil RICO claim based on a derivative injury, thereby failing to demonstrate proximate cause.

The questions presented were: (1) Is the standing requirement for civil RICO claims under 18 USC Sec. 1964(c) jurisdictional in nature under Article III of the United States Constitution, such that a RICO plaintiff must demonstrate both causation and injury under 18 USC Sec. 1964 in order to meet the threshold requirements of Article III; and (2) May a plaintiff assert a civil RICO claim based solely on a derivative injury as a minority shareholder in a limited liability company, where the LLC entity is not itself a party, and there is no direct injury to the plaintiff?

Attorneys: Gerald L. Gulley Jr. (Gulley & Oldham, PLLC) for Ross. Wayne Allen Ritchie II (Ritchie, Dillard, Davies & Johnson, P.C.) for Stooksbury.

Companies: Tellico Landing, LLC

News: RICO