Polycast Technology Corp. v. Uniroyal, Inc.
1992 WL 92757, 1992 U.S. Dist. LEXIS 6592, 792 F. Supp. 244 (1992)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A fraudulent scheme to induce a single victim to enter into a single, non-recurring transaction, which spans only a few months and poses no threat of future criminal conduct, does not satisfy the 'continuity' requirement for establishing a pattern of racketeering activity under the RICO statute.
Facts:
- Uniroyal, Inc. decided to sell its wholly-owned subsidiary, Uniroyal Plastics Company, Inc. ('Plastics'), through an auction process.
- Polycast Technology Corporation ('Polycast') began negotiations to purchase Plastics, initially relying on an offering memorandum projecting Plastics' 1986 earnings at $24 million.
- Between March and June 1986, Uniroyal repeatedly lowered the 1986 earnings forecast for Plastics, from $24 million down to $17.6 million.
- In July 1986, Polycast executed a Stock Purchase Agreement (SPA) based on the $17.6 million forecast.
- In August 1986, Uniroyal again lowered the forecast to $15.5 million, which caused Polycast to exercise its right to terminate the SPA.
- At a September 5, 1986 meeting, Uniroyal representatives presented a new 'rock bottom' 1986 earnings forecast of $13.3 million to persuade Polycast to revive the deal.
- Relying on this new forecast, Polycast agreed to a revised SPA on September 23, 1986.
- In mid-September 1986, Plastics' major customer, Northrop Corporation, cancelled its contract, a material fact that Uniroyal failed to disclose to Polycast before the transaction closed on October 31, 1986.
Procedural Posture:
- Polycast Technology Corporation and Uniroyal Plastics Acquisition Corp. sued Uniroyal, Inc. and its officers and affiliates in the U.S. District Court for the Southern District of New York.
- The complaint was amended several times, ultimately alleging violations of federal securities laws, RICO, common law fraud, negligent misrepresentation, and breach of contract.
- Prior rulings by a different judge in the same court had addressed the legal sufficiency of earlier versions of the complaint.
- After the parties completed extensive discovery, all defendants filed a motion for summary judgment seeking dismissal of all of plaintiffs' claims.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a fraudulent scheme, involving multiple predicate acts over approximately eight months to induce a single purchase of a corporate subsidiary, establish the 'continuity' required for a 'pattern of racketeering activity' under the RICO statute?
Opinions:
Majority - Haight, District Judge
No. A fraudulent scheme lasting approximately eight months to induce a single transaction does not establish the required continuity for a pattern of racketeering activity under RICO. To establish a RICO pattern, a plaintiff must show that the predicate acts are related and that they demonstrate continuity. The court found that while the defendants' alleged acts of fraud were related to the single purpose of selling Plastics to Polycast, they lacked the requisite continuity. There was no 'open-ended continuity' because the sale was a 'one-shot, non-recurring deal' with no threat of future criminal repetition. The scheme also failed the 'closed-end continuity' test, which requires predicate acts extending over a substantial period of time. Citing the Supreme Court in H.J., Inc., the court reasoned that 'predicate acts extending over a few weeks or months and threatening no future criminal conduct' do not constitute the 'long-term criminal conduct' Congress intended RICO to address. Therefore, the defendants' conduct, confined to a single scheme with a single victim over a limited duration, fell outside the scope of the RICO statute.
Analysis:
This decision exemplifies the judicial trend of narrowing the scope of civil RICO claims to prevent the statute from encompassing ordinary business fraud cases. By strictly applying the 'continuity' prong of the pattern requirement from H.J., Inc., the court distinguished between a single, albeit complex, fraudulent transaction and the type of long-term, patterned criminal enterprise RICO was designed to combat. The ruling reinforces that a scheme with a single goal, a single victim, and a duration of less than a year is generally insufficient to establish a RICO claim. This helps maintain a boundary between state common law fraud and the more severe remedies, like treble damages, available under the federal RICO statute.
