De Falco v. Bernas
2001 U.S. App. LEXIS 5256, 244 F.3d 286 (2001)
Rule of Law:
Under RICO, a governmental unit can serve as an enterprise, and officials or associated private individuals can satisfy the "operation or management" test by exerting control, even informally. Hobbs Act extortion based on fear of economic loss is established if the victim reasonably believes the defendant has power to harm and will exploit it; a pattern of racketeering can demonstrate open-ended continuity through escalating demands, but RICO damages must be directly and proximately caused by the predicate acts, not merely speculative.
Facts:
- In May 1987, Joseph DeFalco and Robert Brown, with their wives, formed Top of the World Estates, Inc. (TOP) and JOBO Associates, Inc. (JOBO) to develop approximately 1,700 acres of land in Sullivan County, New York, for residential housing and gravel mining.
- William Dirie, the elected Supervisor of the Town of Delaware, approached DeFalco and stated that in Sullivan County, "you got to deal with the local people," then "suggested" DeFalco hire Harry Fisher, buy landscaping from Planning Board Chairman V. Edward Curtis, purchase equipment from Tax Assessor Donald Meckle, and hire John Bernas for road construction and gravel mining.
- DeFalco complied with Dirie’s initial suggestions, hiring Fisher, buying from Meckle, and agreeing that Bernas' company, John Bernas, Inc. (JBI), would construct roads in exchange for labor costs plus a one-third stock interest in JOBO and a 50-50 split of profits from excess sand and gravel sales.
- When DeFalco resisted Dirie's suggestion to let Dirie’s son cut timber or awarded a logging contract to an outside company, Dirie linked compliance to Planning Board approvals, and the project was subsequently suspended by the Planning Board; when DeFalco complied, the project moved forward.
- Sullivan County Administrator Paul Rouis pressured DeFalco to hire him as accountant and Robert Rosen as attorney, warning that he "can’t bring up New Yorkers" if he wanted the development to proceed.
- Dirie, Bernas, Town Engineer Terry Kelly, and Tax Assessors Ferber and Meckle repeatedly threatened adverse official action or project cancellation, including tax reassessments, if DeFalco did not transfer the one-third JOBO stock interest to Bernas, which DeFalco eventually did in December 1989.
- After DeFalco transferred the JOBO stock to JBI, Bernas then demanded rights to the entire gravel pit, and Dirie explicitly told DeFalco that Phase II approval required giving Bernas the gravel pit.
- DeFalco instructed Bernas to stop removing gravel from the JOBO site after December 1989, but Bernas' people continued, and subsequent threats of adverse political action and significantly increased property taxes were made when DeFalco resisted giving Bernas the entire pit.
Procedural Posture:
- Plaintiffs Top of the World Estates, Inc., JOBO Associates, Inc., Joseph DeFalco, Eleanor DeFalco, Robert Brown, and Janice Brown filed a complaint on September 6, 1990, alleging a RICO violation under 18 U.S.C. § 1962(c) against an assortment of public officials, private individuals, and corporations, claiming they operated the Town of Delaware as a racketeering enterprise.
- On October 17, 1996, the District Court (Judge Barrington D. Parker) dismissed the RICO aiding and abetting claim against defendant William Rosen for failure to state a claim, citing Central Bank of Denver v. First Interstate Bank.
- A first jury trial against eleven remaining defendants, presided over by Judge Parker, took place from December 10-20, 1996, resulting in verdicts against six defendants.
- Following the first trial, the District Court granted motions for judgment as a matter of law for defendants Rouis and Curtis due to insufficient evidence of proximate causation of damages.
- For the remaining four defendants (William Dirie, John Bernas, JML Quarries, Inc., and John Bernas, Inc.), the District Court granted a new trial on both liability and damages, finding the proof of damages too speculative and imprecise and the issues of damages and liability inextricably intertwined.
- The case was retried against the four remaining defendants from February 1-9, 1999, with United States District Judge Charles L. Brieant presiding, which again resulted in jury verdicts against all four defendants.
- After the second trial, Judge Brieant sustained certain damage awards but vacated a special verdict of $1.6 million (before trebling) as having "no relation to reality," concluding there was insufficient credible evidence of damages directly flowing from the predicate acts beyond those specifically found in separate interrogatories.
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Issue:
Can a governmental entity, such as a town, serve as a RICO enterprise through which public officials and associated private individuals conduct a pattern of racketeering activity by extorting property through threats of economic harm, and what constitutes a sufficient showing of such a pattern and proximately caused damages under RICO?
Opinions:
Majority - Underhill, District Judge
Yes, a governmental unit like the Town of Delaware can serve as a RICO enterprise, and public officials and associated private individuals can participate in its affairs through a pattern of racketeering activity via economic extortion; the evidence sufficiently supported the jury's findings on these elements and specific damages, though an additional general damage award was properly vacated for lack of proximate cause. The Court affirmed that a governmental unit can be a RICO enterprise, citing United States v. Angelilli, which held that Congress did not intend to exclude governmental units from RICO's scope given the nature of offenses like bribery and extortion. The jury could reasonably conclude the Town of Delaware was a "passive instrument or victim" of the defendants' racketeering, satisfying the distinctness requirement between the RICO "person" (defendants) and the "enterprise" (Town) as per Cedric Kushner Promotions, Ltd. v. King. The minimal effect on interstate commerce required for a RICO claim was met, as evidenced by an extortionate demand causing DeFalco to break an $8800 contract with an out-of-state lumber company and testimony that the Town's regular business affected interstate commerce. Applying the "operation or management" test from Reves v. Ernst & Young, the Court found ample evidence that Dirie, as Town Supervisor, had a direct role in directing the Town's affairs, using his official authority to impede or advance the development based on DeFalco's compliance with his demands. Similarly, Bernas, though not an official, was found to have exerted control over the Town's affairs through bribery-like influence, evidenced by his ability to dictate approvals and Supervisor Dirie's letter stating that Phase II required Bernas's approval. The Court affirmed that "extortion" under the Hobbs Act, 18 U.S.C. § 1951(b)(2), includes threats of economic loss, which must be viewed from the victim's perspective. It found sufficient evidence that DeFalco reasonably believed Dirie and the Bernas defendants had the power to harm his business and would exploit that power to his detriment, especially as these threats materialized into adverse official actions when DeFalco resisted. The court rejected the Bernas defendants' argument that they had a lawful claim to the JOBO stock and gravel, noting the lack of a formal, written contract and evidence of their breach of a prior agreement. While "closed-ended continuity" was not met due to the predicate acts spanning less than the two-year period typically required in the circuit, "open-ended continuity" was satisfied. The escalating nature of Bernas's demands (from one-third to the entire gravel pit) and repeated threats implied a threat of continued criminal activity, indicating the scheme was not "inherently terminable" but would persist into the future. The Court upheld most specific damage awards against Dirie and the Bernas defendants, finding them supported by evidence, but vacated the $1,000 award for truck wheels and tires due to a complete lack of evidence on their value. The vacatur of the $1.6 million general damage award was affirmed because the plaintiffs failed to show proximate causation between the defendants' conduct and the inability to sell Phase II lots, as other independent factors (like incomplete road work) could have contributed, making the causal link too speculative to satisfy RICO's "by reason of" requirement. The Court also affirmed the prior dismissal against William Rosen, agreeing that the complaint only pleaded aider-and-abettor liability, which is not permitted under RICO after Central Bank of Denver v. First Interstate Bank.
Analysis:
This case significantly reinforces the broad reach of RICO, particularly its applicability to local governmental units and the actions of public officials who use their positions for private gain through economic extortion. It clarifies that even "suggestions" from officials can constitute extortion if the victim reasonably fears economic detriment, especially when followed by adverse official actions upon non-compliance. The decision also provides important guidance on proving continuity in a RICO pattern, emphasizing open-ended continuity through escalating demands and an implied threat of future criminal activity, even when the duration of overt acts is relatively short. Finally, it underscores the strict proximate causation requirement for RICO damages, requiring a direct link between the racketeering activity and the injury, and rejecting speculative claims for lost future profits without clear evidence of entitlement and the absence of intervening factors.
