Antitrust Law Daily Wrap Up, RICO—W.D. Mo: RICO claim allowed to proceed due to unresolved "enterprise" issue, (Jun 26, 2014)

By Edward L. Puzzo, J.D.

A charter school's RICO claim against a management company, for negotiating leases with a company the management company may have owned, could proceed because there was a genuine issue of material fact as to whether or not the separate entities necessary for an "enterprise" existed, the federal district court in Jefferson City, Missouri has ruled (Renaissance Academy for Math and Science of Missouri, Inc. v. Imagine Schools, Inc., June 23, 2014, Laughrey, N.).

Renaissance Academy, a charter school, brought an action against Imagine Schools, a charter school management company. Among other claims, Renaissance alleged that Imagine, in violation of the Racketeer Influenced Corrupt Organizations Act (RICO), negotiated leases on behalf of Renaissance with SchoolHouse Finance, while concealing from Renaissance that Imagine Schools and Schoolhouse Finance were “sister entities.” Imagine moved for summary judgment, contending that Renaissance could not maintain a RICO claim because a requisite "enterprise" did not exist.

Enterprise. A Section 1962(c) RICO violation requires proof of (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity, the court explained. Imagine challenged only the "enterprise" element. Imagine argued that no “enterprise” existed between it and SchoolHouse Finance because at the time the leases were negotiated, SchoolHouse Finance was a wholly owned subsidiary of Imagine Schools and they were not two distinct entities.

The Eighth Circuit has held that a subsidiary is not sufficiently distinct from its parent company so as to establish Section 1962(c)’s requirement of an “enterprise," the court noted. The question here, therefore, was whether there was a genuine issue of material fact as to whether SchoolHouse Finance was a wholly owned subsidiary of Imagine Schools during the time Imagine Schools negotiated leases with SchoolHouse Finance on Renaissance’s behalf.

The court noted that from 2004 to 2006, the initial and sole members of SchoolHouse Finance were Dennis Bakke and Eileen Bakke. In 2006, the Bakkes purportedly assigned all of their interest in SchoolHouse Finance to Imagine Schools. The court noted that subsequent filings in North Carolina indicated that SchoolHouse Finance was entirely owned by Imagine Schools, but reports filed with regulatory agencies in Michigan, Nevada, and Florida showed that the Bakkes retained ownership interests in SchoolHouse Finance. The Bakkes attested that the Michigan, Nevada, and Florida filings were erroneous, and maintained that at the time the leases were negotiated in November 2007 and May 2009, SchoolHouse Finance was a wholly owned subsidiary of Imagine Schools.

Despite stating that the state filings were erroneous, the court observed, the Bakkes failed to explain why the errors occurred, why multiple officers made the errors, why they occurred in multiple states, why they occurred in multiple years, and why, if they were erroneous, the Bakkes had certified to their accuracy when making the filings.

These discrepancies showed, the court continued, that there was a genuine issue of material fact as to whether SchoolHouse Finance was a wholly owned subsidiary of Imagine Schools during the time the leases in question were negotiated. Since the existence of an "enterprise" hinged on this issue, Imagine's motion for summary judgment must be denied, the court ruled.

The case is Civil Action No. 4:13-CV-00645-NKL.

Attorneys: Dana T. Cutler (James W. Tippin & Associates) for Renaissance Academy for Math and Science of Missouri, Inc. Jan P. Miller (Thompson Coburn LLP) for Imagine Schools, Inc.

Companies: Renaissance Academy for Math and Science of Missouri, Inc.; Imagine Schools, Inc.

Cases: RICO MissouriNews