Sk Hand Tool Corporation and Corcoran Partners, Ltd. v. Dresser Industries, Inc.

Citations: 852 F.2d 936; 1988 U.S. App. LEXIS 10826; 1988 WL 75550Docket: 87-2294, 87-3067

Court: Court of Appeals for the Seventh Circuit; July 18, 1988; Federal Appellate Court

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Corcoran Partners and SK Hand Tool Corporation appeal the dismissal of Count IV of their third amended complaint against Dresser Industries, alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) due to mail and wire fraud in overstating the value of Dresser’s hand tool division. The district court dismissed this count for failure to allege a "pattern of racketeering activity," necessary for RICO claims, and awarded costs to Dresser. Dresser sought sanctions against Corcoran for pursuing frivolous appeals, but the court affirmed the dismissal and denied the sanctions.

In reviewing the complaint, all allegations were construed as true. The complaint described Dresser as a large manufacturer whose hand tool division, facing financial losses, was managed by employees who allegedly concealed its true financial state from Dresser's leadership and the investing public. Although the complaint lacked specifics on who was involved in the scheme, it indicated that the division utilized accounting practices that obscured its financial issues.

In 1983, Dresser planned to sell the hand tool division to Corcoran. Discussions between Dresser's Senior VP, Rex Sebastian, and Corcoran’s representatives occurred regarding the sale terms. It remains unclear if Sebastian was aware of the scheme to inflate the division's value. After agreeing on terms based on the Effective Date Balance Sheet, Corcoran's partner Daniel Czuba sought further details about the division, during which Dresser employees misrepresented the financial condition, including a significant understatement of liabilities associated with outstanding commitments.

In October 1983, John Macauley, Controller of the Tool Group, misrepresented the division's accounting practices as being only non-compliant in the area of intracompany transfers, despite knowing that discrepancies existed in multiple areas unrelated to these transfers. When Czuba requested the obsolete inventory list, Macauley failed to provide it but promised accurate figures, which were later found to be incorrect due to two items being omitted. Additionally, George Fansmith informed Czuba of an accrued liability for cooperative advertising allowances that was not reflected on the balance sheet.

On October 10, Dresser sent Corcoran a draft purchase agreement, followed by a final Effective Date Balance Sheet on December 13, which was to determine the purchase price. However, the Effective Date Balance Sheet did not accurately represent the division's assets and liabilities, leading to an inflated purchase price. Consequently, Corcoran claimed arbitration based on the purchase agreement after recognizing the overpayment, but was unsatisfied with the arbitrator's conclusion of a $1.386 million overpayment. Corcoran subsequently filed a lawsuit alleging fraud, breach of contract, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), asserting that Dresser engaged in a scheme involving mail and wire fraud to deceive Corcoran.

Initially, the district court denied Dresser's motion to dismiss, agreeing that Corcoran had sufficiently alleged a pattern of racketeering activity. However, two years later, the court dismissed the case, referencing precedents that concluded acts of fraud resulting in a single injury from a single transaction do not constitute a pattern of racketeering. Under RICO, a plaintiff must demonstrate a "pattern of racketeering activity," defined as at least two acts occurring within a ten-year period. The Supreme Court emphasized that establishing a pattern requires both continuity and relationship between the acts of racketeering.

Since the Sedima case, the court has encountered numerous instances regarding whether defendants exhibited a pattern of racketeering activity, yet it has refrained from establishing a definitive definition of "pattern." This lack of a strict definition allows for flexibility in civil RICO cases while adhering to the Supreme Court's requirement for continuity and relationship among predicate acts. The court evaluates factors such as the number and variety of predicate acts, the duration over which they occurred, the number of victims, the presence of distinct schemes, and the nature of injuries involved. This approach is aligned with Congress' intent to encourage private actions for victims of racketeering.

In comparing the current case to Lipin, the court agrees with the lower court's assessment that the situation is similar. In Lipin, twelve acts of mail fraud concerning misrepresentations of a company's value were deemed insufficient to establish a pattern of racketeering activity, as they involved only one victim and one instance of fraud. The court emphasized that mere complexity in transactions does not create ongoing predicate acts. 

In the present case, Dresser's mail and wire fraud activities were also confined to a single transaction, occurring over a few months, and directed at one victim (Corcoran) during the sale of a business division. The fraudulent misrepresentations aimed to inflate the sale price but did not constitute separate transactions, as they only affected Corcoran at the point of sale. Furthermore, similar to Lipin, there is no indication of ongoing fraudulent activity by Dresser following the sale.

Corcoran attempts to differentiate its case from Lipin by arguing that Lipin involved multiple fraudulent schemes, while the circuit has previously rejected a requirement for multiple schemes in determining racketeering activity. Of eight post-Morgan cases with single schemes, only two (Liquid Air Corp. and Appley v. West) were recognized as having a pattern of racketeering. A recent clarification emphasized that a defendant's involvement in multiple schemes is significant evidence of racketeering, prompting Corcoran to allege that the scheme to misrepresent the division's value included concealing heavy losses from Dresser's officers and directors, thus asserting two converging schemes: one by division employees and the other by Dresser through the sale to Corcoran.

However, the relevant scheme against Dresser is solely the one perpetrated by it to defraud Corcoran. Two main obstacles arise: first, Corcoran's claim implies that Dresser is both a victim and a perpetrator of the same misrepresentations, which the court rejects, emphasizing that RICO targets those profiting from racketeering, not victims. Dresser cannot be a victim if it profited from the fraudulent sale. Second, if the division employees defrauded Dresser's officers, it was the employees, not Dresser, who defrauded Corcoran, making Dresser an "unwilling conduit" and not vicariously liable under RICO.

Corcoran's complaint focuses on fraud by Dresser in the sale of the division, which implies that Dresser's officers knew about the misrepresentations, contradicting the idea that Dresser was deceived by its employees. Therefore, if Dresser was not deceived, only Corcoran was the victim, indicating a single scheme. Although Corcoran initially argued that the employees' actions also defrauded Dresser's investors, this argument was not pursued on appeal, with Corcoran instead concentrating on the deception of Dresser's officers and directors.

The court finds that Corcoran's complaint lacks sufficient factual allegations to support a claim that Dresser defrauded investors. It does not establish whether Dresser’s stock price reflected the misrepresented value of its division, or if any investors relied on those misrepresentations and suffered damages as a result. The complaint fails to clarify how the financial overstatements occurred and whether they constituted fraud, leaving open the possibility that only Dresser's officers and directors were misled. 

Additionally, the complaint does not overcome the challenge of vicarious liability under RICO for Dresser, as it cannot be held liable for the actions of its employees if those actions did not deceive investors. The alleged acts of mail and wire fraud were directed solely at defrauding Corcoran, not the investing public. 

The court also distinguishes this case from a previous ruling (Liquid Air), noting that Corcoran’s situation does not involve repeated economic injuries from a single scheme. Instead, Corcoran's claims stem from a singular economic injury that occurred when it purchased the division, resulting from various misrepresentations, rather than multiple distinct harms. The injuries cited by Corcoran are interconnected and arise from the overall harm of overpaying for the division.

Dresser's misrepresentation regarding the hand tool division's financial condition does not qualify as a pattern of racketeering activity, as the associated acts of mail and wire fraud occurred solely after Corcoran expressed interest in purchasing the division, resulting in only one harm to a single victim. Corcoran's appeal against the district court's cost award of $41,318.50 to Dresser faces a significant challenge because district courts have broad discretion in awarding costs to prevailing parties, provided there is statutory authority for the taxed items. The review process for recoverable expenses is meticulous, but courts defer to the district court's judgment on reasonableness. The district court's authority to tax costs stems from Fed. R. Civ. P. 54(d), which typically favors the prevailing party unless directed otherwise. Under 28 U.S.C. § 1920, a federal court can tax specific costs, including court reporter fees for necessary stenographic transcripts. Corcoran contends that the district court improperly awarded deposition transcript costs, arguing they are not listed in § 1920, which the Supreme Court has deemed exhaustive for taxable costs. However, deposition transcripts have been classified as "stenographic transcripts" under § 1920(2) by precedent. While Corcoran acknowledges the Supreme Court's ruling indicates a more restrictive approach to cost awards, the district court did not exceed its authority and limited its award to costs enumerated in § 1920, interpreting deposition transcripts as covered by this section.

Section 1920 does not explicitly address the recovery of deposition costs, but courts may interpret it to include deposition transcripts, as supported by Fifth and Fourth Circuit precedents. Reasonably necessary deposition costs are recoverable, while certain expert fees are not, per Crawford Fitting. The court affirmed that deposition transcript costs can be awarded under section 1920. 

Corcoran contested that the district court arbitrarily set deposition costs at $30,000 without explaining its methodology. Although the court's process was unclear, it was deemed not an abuse of discretion. Similarly, Corcoran challenged a $10,000 photocopying cost award as arbitrary. The court had reduced the original request of $18,631.92, and this decision was upheld.

Corcoran also argued that Dresser's witness fees exceeded the statutory limit of $30, but Dresser maintained that its request included mileage allowances under the statute, warranting reliance on its representation despite inadequate documentation.

Furthermore, Corcoran claimed that the district court failed to deduct costs related to a fraud claim pending in state court. The district court acknowledged the overlap in discovery costs across multiple claims but did not mathematically deduct expenses associated with the fraud claim, a decision accepted as reasonable.

Lastly, Corcoran contended that discovery costs linked to the dismissed RICO count should not be recoverable. The district court rejected this argument, emphasizing that discovery does not need to stop during a motion to dismiss unless explicitly ordered, thus affirming its discretion to award costs incurred in relation to the RICO dismissal.

The district court's award of costs to Dresser is upheld due to the standard of review being limited to identifying an abuse of discretion. Prevailing parties are generally entitled to costs, and Dresser's request was notably reduced by one-third, leading to no grounds for overturning the decision. The court encourages future district courts to provide detailed explanations for their cost determinations. Dresser's request for sanctions against Corcoran under Fed.R.App. P. 38 for frivolous appeals is denied, as the court does not find Corcoran's arguments frivolous despite their rejection. The complexity surrounding RICO claims and the district court's earlier contradictory rulings contributed to Corcoran's reasonable decision to appeal. 

While affirming the cost determination, the court acknowledges that the issue is contentious, noting potential concerns regarding taxing deposition transcripts and questioning the derivation of some figures. Dresser's requests for sanctions are criticized for being generic and boilerplate, lacking specificity and justification related to the case. The court refrains from imposing sanctions against Dresser for these requests but expresses disapproval of the casual approach to such requests. Ultimately, the judgments dismissing Count IV of Corcoran's complaint and awarding costs of $41,318.50 to Dresser are affirmed.

Corcoran seeks treble damages under 18 U.S.C. § 1964(c) for alleged violations of RICO by Dresser, specifically citing 18 U.S.C. § 1962(a), (b), and (c). Corcoran claims Dresser received income from racketeering activities associated with the sale of a division and used that income to operate the company, thus violating § 1962(a). Additionally, Corcoran alleges that Dresser improperly gained or maintained an interest in an interstate enterprise through racketeering, violating § 1962(b), and that Dresser conducted the affairs of an interstate enterprise through racketeering, violating § 1962(c). 

The document describes "lifts," a practice where manufacturers gain shelf space by providing credit to wholesalers or retailers to incentivize them to deplete competitors' inventories. Various acts of mail and wire fraud are identified, including communications between Dresser employees and letters sent to Corcoran concerning a balance sheet and purchase agreement. The definitions of mail and wire fraud are outlined under 18 U.S.C. §§ 1341 and 1343.

The excerpt also addresses the requirement for establishing a "pattern" of racketeering activity, stating that two acts may not be sufficient to constitute a pattern, and highlighting the necessity for continuity and relationship among the acts. Case law is referenced, indicating that RICO is not intended for isolated offenses but rather for ongoing criminal behavior. Specifically, the Lipin case illustrates that allegations must show multiple victims or instances to meet this requirement. The discussion includes a caution against treating every fraudulent transaction as a separate scheme, as emphasized in the Jones case. 

Additionally, Corcoran's arguments regarding the taxation of pretrial transcript costs and the inclusion of miscellaneous charges are addressed, affirming the court's discretion under Local Rule 45(b) to allow certain costs. Finally, the court dismisses Corcoran's claim that deposition costs should be deducted while a motion to dismiss was pending, asserting that discovery may continue during such motions.