Antitrust Law Daily Wrap Up, RICO—WDWash: Deprivation of “Honest Services” Does Not Provide Standing to Bring RICO Claim, (Mar 22, 2013)

By Tobias J. Gillett, J.D., LLM.

Real estate developers did not have standing to bring Racketeer Influenced and Corrupt Organizations (RICO) Act claims against financial institutions, a law firm, and related individuals, because a failure to render “honest services” for purposes of mail and wire fraud did not constitute a sufficiently concrete financial loss to confer standing, the federal district court in Seattle has ruled (Portfolio Investments, LLC v. First Savings Bank, March 20, 2013, Jones, R.).

Marcia and Steven Nikolich are real estate developers operating through the company Portfolio Investments, LLC. The developers had outstanding real estate loans through Executive House, Inc. (EHI) when EHI was acquired by First Savings Bank Northwest (FSB). In 2006, the developers obtained loans from FSB to purchase properties for a new development. In 2008, the developers obtained approval from the City of Gig Harbor, Washington for their development and sought to obtain additional financing from FSB.

However, FSB informed the developers that it was “no longer interested in financing real estate development projects,” but that they would “get all the help that [they] needed.” By late December 2008, developers were apparently having trouble making their loan payments and offered to pay 50% of the interest on the loans “over the next few months.” FSB refused, but the parties later reached an agreement under which the developers would make interest-only payments for 12 months.

The developers made payments under the agreement in June and July 2009, but in August 2009 they learned an insurance policy was being canceled, even though they believed FSB would keep their insurance and taxes current. An FSB representative did not respond to messages left for him, and FSB representatives did not appear for other meetings on their issues. In January 2010, FSB posted notices of default on the developers’ buildings.

On January 28, 2010, the developers received a letter from Tax Attorneys, Inc. (TAI), informing them that TAI could use “unique litigation” to stop foreclosure actions. When the developers met with TAI attorneys, the attorneys claimed to have “inside confidential information of several financial institutions, including FSB,” and that they had contacted the developers because they had that information.

The developers continued to negotiate with FSB, and proposed having private investors purchase the outstanding loan balances at a 50% discount. The developers claimed to have various interested investors, but that FSB did not respond to them. The investors wanted assurances that the auctions for the properties would be stayed.

The developers listed their properties with a real estate company associated with TAI, and then filed for bankruptcy to stay the auctions. An FSB representative contacted the developers, informing them that FSB was still interested in the developers’ proposal and telling them to have the TAI attorneys contact the representative. However, one TAI attorney told the developers to wait until FSB provided something in writing, and another told them to wait “a couple of weeks.” An FSB representative called the developers and left messages informing them that the TAI attorneys never contacted FSB. The TAI attorneys also did not respond to the developers’ further attempts to contact them, and on October 20, 2010 the developers terminated the services of TAI and the real estate company.

On January 19, 2012, the developers filed suit against FSB, EHI, TAI, and various entities and individuals associated with each of them. The developers asserted claims for violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act and for conspiracy to violate it, among other claims. The defendants moved to dismiss.

The court granted the motion to dismiss with respect to the RICO claims. The court explained that, to establish standing to bring a RICO claim, “a plaintiff must demonstrate that he has suffered harm to a specific business or property interest,” which requires “identify[ing] both a concrete financial loss and a specific business or property interest.”

Here, the developers alleged only that the defendants’ activities “constitute conduct engaged in by defendants to deprive plaintiffs of their interest in business and/or property,” and claimed that the defendants “deprived plaintiffs of their intangible property right to receive the rendition of ‘honest services’ for purposes of federal mail fraud and wire fraud statutes.” The court observed that, while the Ninth Circuit might have held that economic harm is not part of honest services fraud, that ruling only applied to a case involving an attempt to defraud the public, and, more importantly, did not involve a RICO violation.

With respect to RICO cases, the court explained, “the Ninth Circuit has held that ‘mere injury to a valuable intangible property interest’ is insufficient,” and that “deprivation of ‘honest services’ does not constitute concrete financial loss.” The developers had not demonstrated any concrete financial loss, nor had they shown that any of the alleged predicate acts had proximately caused them any injuries. Therefore, the developers did not have standing to bring their RICO claims.

Furthermore, the Supreme Court had concluded in its 2010 decision in United States v. Skilling, 130 S. Ct. 2896, “that the honest services fraud statute only proscribes bribery and kickbacks,” neither of which had been alleged here. Therefore, the court dismissed the developers’ RICO claims.

The court also dismissed the developers claims for racial discrimination under 42 U.S.C. §§ 1981-1982, and declined to exercise its supplemental jurisdiction over a state law claim for legal malpractice against TAI and two of its attorneys.

The case is No. C12-104 RAJ.

Attorneys: Dean Browning Webb for Portfolio Investments LLC. Jay Roderik Stephens (The Stephens Law Firm, PS) for First Savings Bank Northwest. Robert Emmett West, Jr. for Executive House Inc.

Companies: Portfolio Investments LLC; First Savings Bank; Executive House Inc.; Tax Attorneys, Inc.

Cases: RICO WashingtonNews