Date: Sep 1, 1998

Affirmation of RICO Claim Dismissal and Limits on Aiding and Abetting Liability: Rolo v. City Investing Co. Liquidating Trust

Introduction

In the landmark case Rolo v. City Investing Company Liquidating Trust et al., decided by the United States Court of Appeals for the Third Circuit on August 31, 1998, the plaintiffs—Jose and Rosa Rolo alongside Dr. William and Rosanne Tenerelli—challenged the practices of General Development Corporation ("GDC") and its subsidiary GDV Financial, Inc. ("GDV"). The plaintiffs alleged that they were victims of a fraudulent marketing scheme orchestrated by the defendants, which led them to purchase residential lots and homes at artificially inflated prices. This comprehensive commentary delves into the intricacies of the judgment, its legal reasoning, the precedents cited, and its broader implications on the applicability of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Summary of the Judgment

The Third Circuit Court upheld the decision of the United States District Court for the District of New Jersey, which had dismissed all of the plaintiffs' claims. The dismissal was based on several grounds: the plaintiffs' RICO claims were time-barred, they failed to adequately plead the existence of a RICO conspiracy, and they did not meet the pleading requirements under Rule 9(b) for fraud. Additionally, the court affirmed that private causes of action for aiding and abetting under RICO are not permissible, aligning with the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.

Analysis

Precedents Cited

The judgment prominently references several key cases:

Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (511 U.S. 164, 1994): Established that private plaintiffs cannot maintain causes of action for aiding and abetting violations under RICO.
REVES v. ERNST YOUNG (507 U.S. 170, 1993): Clarified the parameters for defining "persons" and "enterprise" under RICO, impacting the plaintiffs' claims.
JAGUAR CARS, INC. v. ROYAL OAKS MOTOR CAR CO. (46 F.3d 258, 3d Cir. 1995): Addressed the liability of officers and employees under RICO but did not extend to aiding and abetting claims.
Klehr v. A.O. Smith Corp. (117 S.Ct. 1984, 1997): Held that the "last predicate act" method for RICO statute of limitations was incorrect, though it left open the "injury and pattern discovery" method.
FOMAN v. DAVIS (371 U.S. 178, 1962): Established the standard for granting leave to amend pleadings.
Seville Indus. Machinery v. Southmost Machinery (742 F.2d 786, 3d Cir. 1984): Provided guidance on pleading fraud with particularity under Rule 9(b).

Legal Reasoning

The Third Circuit's decision hinged on multiple legal standards:

Statute of Limitations: The court reaffirmed that RICO claims are subject to the four-year statute of limitations under the Clayton Act. Even considering the Supreme Court’s stance in Klehr, the plaintiffs likely failed to meet the required timely filing, especially given their substantial delay in initiating litigation.
Aiding and Abetting Liability: Following Central Bank of Denver, the court held that private plaintiffs cannot assert aiding and abetting claims under RICO. This limitation was critical in dismissing the vast majority of the plaintiffs' claims against secondary defendants.
Rule 9(b) Particularity: The plaintiffs failed to adequately specify the fraudulent misrepresentations made to them individually. The court emphasized that under Rule 9(b), plaintiffs must provide detailed allegations of their own experiences with fraud, not just generalized statements applicable to a broader class.
Leave to Amend: The court determined that the plaintiffs did not demonstrate exceptional circumstances necessary for the district court to grant leave to amend their complaint. Given the procedural history and prior opportunities to amend, the denial was within the district court's discretion.

Impact

This judgment has significant implications for future litigation involving RICO:

Restricting RICO Applications: By affirming that aiding and abetting claims are not permissible for private plaintiffs under RICO, the decision narrows the scope of RICO's applicability in private civil actions.
Pleading Standards: The strict enforcement of Rule 9(b) underlines the necessity for plaintiffs to meticulously detail their fraud claims, discouraging plaintiffs from leveraging generalized allegations without specific factual support.
Statute of Limitations: The affirmation reinforces the four-year limitations period for civil RICO claims, emphasizing the importance of timely litigation.
Procedural Rigor: The refusal to allow further amendments underscores the judiciary's expectation for plaintiffs to present well-pleaded claims early in the litigation process.

Complex Concepts Simplified

Racketeer Influenced and Corrupt Organizations Act (RICO)

RICO is a federal law designed to combat organized crime in the United States. It allows for leaders of a syndicate to be tried for the crimes they ordered others to do or assisted them in doing. In civil cases, plaintiffs can sue for damages if they are injured by a RICO violation.

Aiding and Abetting Liability

This refers to legal liability imposed on someone who facilitates or assists another in committing a wrongdoing. Under RICO, this could mean helping to organize or manage the criminal enterprise.

Rule 9(b) of the Federal Rules of Civil Procedure

Rule 9(b) requires that any allegation of fraud in a complaint be stated with particularity. This means plaintiffs must provide specific details about the fraudulent conduct, including when, where, and how it occurred.

Statute of Limitations

This is a law that sets the maximum time after an event within which legal proceedings may be initiated. In the context of RICO, the statute of limitations determines how long plaintiffs have to file a lawsuit after discovering the wrongdoing.

Conclusion

The Third Circuit's affirmation in Rolo v. City Investing Co. Liquidating Trust et al. serves as a crucial reminder of the stringent requirements that plaintiffs must satisfy in RICO-related litigation. By upholding the dismissal of RICO claims due to insufficient pleading of fraud and reinforcing the inapplicability of aiding and abetting claims in private civil actions, the court has delineated the boundaries within which RICO can be effectively employed. This decision underscores the judiciary's commitment to maintaining high standards of legal pleadings and ensuring that RICO remains a potent tool against organized crime without overextension into areas not envisioned by Congress.

Case Details

JOSE AND ROSA ROLO; AND DR. WILLIAM AND ROSEANNE TENERELLI v. CITY INVESTING COMPANY LIQUIDATING TRUST; AmBASE CORPORATION; CARTERET BANCORP, INC.; FEDERAL DEPOSIT INSURANCE CORPORATION, AS SUCCESSOR TO RESOLUTION TRUST CORPORATION, IN ITS CAPACITY AS RECEIVER OF CARTERET SAVINGS BANK, FA; THE HOME INSURANCE COMPANY; GEORGE T. SCHARFFENBERGER; MARSHALL MANLEY; EDWIN I. HATCH; EBEN W. PYNE; REUBIN O'D. ASKEW; HOWARD L. CLARK, JR.; CHARLES J. SIMONS; PETER R. BRINKERHOFF; DAVID F. BROWN; ROBERT F. EHRLING; CRAVATH, SWAINE MOORE; DAVID G. ORMSBY; FEDERAL DEPOSIT INSURANCE CORPORATION, IN ITS CAPACITY AS RECEIVER OF SOUTHEAST BANK, NA; PAINEWEBBER INCORPORATED; MERRILL LYNCH, PIERCE, FENNER SMITH, INC.; THE PRUDENTIAL INSURANCE COMPANY OF AMERICA; NATIONAL BANK OF CANADA; CITICORP REAL ESTATE, INC.; FIRST NATIONAL BANK OF BOSTON; FEDERAL NATIONAL MORTGAGE ASSOCIATION; FEDERAL HOME LOAN MORTGAGE CORPORATION; CHASE FEDERAL BANK, FSB; CITIZENS AND SOUTHERN TRUST COMPANY (FLORIDA), NA; REGIONS BANK OF LOUISIANA, AS SUCCESSOR TO SECOR BANK, FSB; OXFORD FIRST CORP.; THE OXFORD FINANCE COMPANIES, INC.; LASALLE BUSINESS CREDIT, INC.; AS SUCCESSOR TO STANCHART BUSINESS CREDIT, INC.; HARBOR FEDERAL SAVINGS AND LOAN ASSOCIATION; GREYHOUND FINANCIAL CORPORATION; LLOYDS BANK PLC; AND JOHN DOES 1-10 JOSE ROLO, ROSA ROLO, DR. WILLIAM TENERELLI, AND ROSEANNE TENERELLI, AND PROPOSED INTERVENOR PLAINTIFFS DOMINICK J. CAPEZZA, ESTRELITA CAPEZZA, JACQUES CORMIER, ANITE CORMIER, STEVEN KALINOWSKI, BERNARD KALINOWSKI, CHARLES R. PANELLINO, AND CLARISSE PANELLINO, APPELLANTS IN 95-5768 PROPOSED INTERVENOR PLAINTIFFS DOMINICK J. CAPEZZA, ESTRELITA CAPEZZA, JACQUES CROMIER, ANITE CORMIER, STEVEN KALINOWSKI, BERNARD KALINOWSKI, CHARLES R. PANELLINO, AND CLARISSE PANELLINO, APPELLANTS IN 96-5128

Year: 1998 Court: United States Court of Appeals, Third Circuit.

Judge(s)

Jane Richards Roth

Attorney(S)

Herbert I. Deutsch, Esq. Roy A. Heimlich, Esq. (Argued) Deutsch Frey, 18 East 41st Street, 6th Floor, New York, N Y 10017; William J. O'Brien, Esq. Delany O'Brien, 306 West Somerdale Road, Voorhees, NJ 08043. Attorneys for Appellants: Jose Rolo; Rosa Rolo; William Tenerelli; Roseanne Tenerelli; Dominick J. Capezza; Estrelita Capezza; Jacques Cormier; Anite Cormier; Steven Kalinowski; Bernard Kalinowski; Charles R. Panellino and Clarisse Panellino; Douglas S. Eakeley, Esq. (Argued) Lowenstein, Sandler, Kohl, Fisher Boylan, 65 Livingston Avenue, Roseland, NJ 07068; Paul M. Dodyk, Esq. Cravath, Swaine Moore, Worldwide Plaza, 825 Eighth Avenue, New York, N Y 10019: Attorneys for Appellees: AmBase; City Investing Company Liquidating Trust; Carteret Bancorp Inc.; George T. Scharffenberger; Marshall Manley; Edwin I. Hatch; and Eben W. Pyne; Nicholas d'B. Katzenbach, Esq. (Argued) 906 Great Road, Princeton, NJ 08540; Peter N. Perretti, Jr., Esq. Riker, Danzig, Scherer, Hyland Perretti, One Speedwell Avenue Headquarters Plaza, Morristown, NJ 07962-1981. Attorneys for Appellees: Cravath, Swaine Moore and David G. Ormsby; Alan J. Kluger, Esq. (Argued) Steve I. Silverman, Esq. Kluger, Peretz, Kaplan Berlin, 201 South Biscayne Boulevard, Suite 1970, Miami, FL 33131; Joseph A. Boyle, Esq. Kelley, Drye Warren, 5 Sylvan Way, Parsippany, NJ 07054. Attorneys for Appellee: Greyhound Financial Corporation; John W. Little, III, Esq. Gerry S. Gibson, Esq. (Argued) Steel, Hector Davis, 777 South Flagler Drive, 1900 Phillips Point West, West Palm Beach, FL 33401; Joseph J. Schiavone, Esq. Budd, Larner, Gross, Rosenbaum, Greenberg Sade, 150 John F. Kennedy Parkway, CN 1000, Short Hills, NJ 07078-0999. Attorneys for Appellee: Federal National Mortgage Association; Steven M. Edwards, Esq. Davis, Scott, Weber Edwards, 100 Park Avenue, 32nd Floor, New York, N Y 10017; Attorneys for Appellees David F. Brown and Robert F. Ehrling; Elizabeth J. Sher, Esq. Pitney, Hardin, Kipp Szuch, P.O. Box 1945, Morristown, NJ 07962-1945. Attorney for Appellee: Home Insurance Co.; Peter W. Homer, Esq. Homer Bonner, 100 Southeast 2nd Street, 3400 International Place, Miami, FL 33131. Attorney for Appellee: Citizens and Southern Trust Company National Association; Joseph L. Buckley, Esq. Mark E. Duckstein, Esq. Sills, Cummis, Zuckerman, Radin, Tischman, Epstein Gross, One Riverfront Plaza, Newark, NJ 07102; Robert T. Wright, Jr., Esq. Shutts Bowen, 201 South Biscayne Boulevard, 1500 Miami Center, Miami, FL 33131. Attorneys for Appellees: Reubin O'D. Askew; Howard L. Clark, Jr.; Charles J. Simons; and Peter R. Brinkerhoff; James J. Hagan, Esq. Bruce D. Angiolillo, Esq. Simpson, Thacher Bartlett, 425 Lexington Avenue, New York, N Y 10017; James M. Altieri, Esq. Shanley Fisher, 131 Madison Avenue, Morristown, NJ 07962-1979. Attorneys for Appellee: Painewebber, Inc.; Warren H. Colodner, Esq. Kirkpatrick Lockhart, 1251 Avenue of the Americas, 45th Floor, New York, N Y 10020-2195. Attorneys for Appellee: Merrill, Lynch, Pierce, Fenner Smith, Inc.; Steven H. Reisberg, Esq. Willkie, Farr Gallagher, 153 East 53rd Street, One Citicorp Center, New York, N Y 10022; Robert E. Bartkus, Esq. Pinto, Rodgers and Kopf, 107 Washington Street, Morristown, NJ 07960. Attorneys for Appellee: Prudential Insurance Company of America; L. Louis Mrachek, Esq. Roy E. Fitzgerald, Esq. Gunster, Yoakley, Valdes-Fauli Stewart, 777 South Flagler Drive, Suite 500 East, West Palm Beach, FL 33401. Attorney for Appellee: National Bank of Canada; George J. Wade, Esq. Shearman Sterling, 153 East 53rd Street, New York, NY 10022; Steven M. Richman, Esq. Herrick, Feinstein, 104 Carnegie Center, Suite 200, Princeton, NJ 08540. Attorneys for Appellee: Citicorp Real Estate; Steven I. Adler, Esq. Cole, Schotz, Meisel, Forman Leonard, 25 Main Street, P.O. Box 800, Court Plaza North, Hackensack, NJ 07602. Attorney for Appellee: The First National Bank of Boston; Gerald J. Houlihan, Esq. Houlihan Partners, Douglas Centre, 2600 Douglas Road, Suite 600, Miami, FL 33134. Attorneys for Appellee: Chase Federal Bank; Robert L. Young, Esq. Carlton, Fields, Ward, Emmanuel, Smith Cutler, P.O. Box 1171, Orlando, FL 32802. Attorney for Appellee: Harbor Federal Savings and Loan Association; David T. Eames, Esq. Bodian Eames, 450 Lexington Avenue, Suite 3810, New York, N Y 10017. Attorney for Appellee: Lloyds Bank, PLC; Edward B. Deutsch, Esq. McElroy, Deutsch Mulvaney, 1300 Mount Kemble Avenue, P.O. Box 2075, Morristown, NJ 07962-2075. Attorney for Appellee: Regions Bank LA, as Successor to SECOR Bank, FSB; Kevin M. Hart, Esq. Stark, Stark, 993 Lenox Drive, Princeton Pike Corporate Center, CN 5315, Princeton, NJ 08543-5315. Attorney for Federal Deposit Insurance Corporation, in its capacity as Receiver of Southeast Bank, NA and Federal Deposit Insurance Corporation, as Successor to Resolution Trust, in its capacity as Receiver of Carteret Savings Bank, FA; John H. Denton, Esq. Connell, Foley Geiser, 85 Livingston Avenue, Roseland, NJ 07068. Attorneys for Appellee: Federal Deposit Insurance Corporation, as Successor to Resolution Trust, in its capacity as Receiver of Carteret Savings Bank, FA; J. Marbury Rainer, Esq. Parker, Hudson, Rainer Dobbs, 285 Peach Center Avenue, 1500 Marquis Two Tower, Atlanta, GA 30303. Attorney for Appellee: LaSalle Business Credit, as Successor to Stanchart Business Credit, Inc.; George Kielman, Esq., Mailstop 202, Federal Home Loan Mortgage Corporation Legal Department, 8200 Jones Branch Drive, McLean, VA 22102; George T. Ford, Esq. Landman, Corsi, Ballaine Ford, One Gateway Center, Suite 500, Newark, NJ 07102. Attorneys for Appellee: Federal Home Loan Mortgage Corporation; Alan I. Moldoff, Esq. Adelman, Lavine, Gold Levin, 1900 Two Penn Center, Philadelphia, PA 19102. Attorney for Appellees: Oxford Fin Co., And Oxford First Corp.