Chang v. Chen

Citations: 80 F.3d 1293; 1996 WL 155015Docket: No. 94-55583

Court: Court of Appeals for the Ninth Circuit; April 3, 1996; Federal Appellate Court

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Ming-Chu Chang, Kang-Jye Chen, Ching-Chieh Chang, and A.C.I. Trading, Inc. (collectively "Appellants") appeal the dismissal of their second amended complaint by the district court, which found they failed to sufficiently allege a RICO enterprise against Eugene Gabrych, Marian Gabrych, and Eddie Lin (collectively "Appellees"). The case centers on alleged RICO violations linked to real estate transactions from 1989 and 1990. The district court determined that under the precedent set by United States v. Turkette, a RICO enterprise must have a distinct structure separate from the racketeering activities themselves. The court affirmed that Appellants did not establish a cognizable RICO enterprise and upheld the dismissal without leave to amend, concluding further amendments would not rectify the deficiencies.

Initially, Appellant Ming-Chu Chang filed a federal action alleging RICO and state law fraud against Appellees, which was dismissed for improper pleading but allowed to be amended. After subsequent amendments and dismissals, Appellants submitted a second amended complaint detailing several transactions involving Appellees, alleging fraudulent practices in securing buyers for land options in Riverside County. Despite these allegations, the court found the claims insufficient to satisfy the requirements of a RICO enterprise.

An "unsuspecting" buyer was deceived into making a nonrefundable deposit into a second escrow account without knowledge of an existing first escrow. The financing was secured by a trust deed on the property, which involved a nonrefundable deposit, interest-only payments for a limited period, and a balloon payment for the remaining purchase price. Appellees sometimes used a "straw man" to purchase the property at an inflated price just before closing the second escrow, thereby obscuring the true property value from the buyer. Appellees Eddie Lin, Eugene Gabrych, Marian Gabrych, and George Realty were alleged to have formed a RICO enterprise to conduct fraudulent real estate transactions. Each Appellee had a significant role: the Gabrychs located properties at low costs, while Lin misled buyers about property values and facilitated the execution of purchase agreements. They profited from the nonrefundable deposits received. 

On February 28, 1994, the district court heard a motion to dismiss the second amended complaint, which ultimately found it did not sufficiently allege a RICO enterprise or specific predicate acts against Marian Gabrych and Lin. The court concluded that the deficiencies could not be cured by amendment, leading to a dismissal without leave to amend and a judgment for the Appellees on March 28, 1994. This dismissal is subject to de novo review, focusing on the complaint’s contents, where all material facts are assumed true and viewed favorably for the nonmoving party. The RICO statute prohibits individuals associated with an enterprise from conducting its affairs through a pattern of racketeering or unlawful debt collection. The appeal questions the minimum requirements for establishing an associated-in-fact enterprise under RICO.

The Supreme Court established in United States v. Turkette that individuals associated for unlawful purposes can form an enterprise under RICO, requiring proof of (1) an ongoing organization, and (2) that the associates function as a continuing unit. The second amended complaint in this case alleged that the Appellees acted as a continuing unit; however, the district court found it lacked sufficient structure to qualify as an enterprise under RICO. There is no definitive guideline from Turkette on the necessary structure of an organization for RICO purposes, leading to a split among circuit courts. Six circuits interpret Turkette as necessitating an enterprise to have a distinct structure apart from its racketeering activities, citing concerns that a broad definition could blur the line between the enterprise and racketeering elements. In contrast, two circuits adopt a minority view that allows an organization to consist solely of the predicate racketeering acts. The Ninth Circuit has not yet determined the structure required for RICO’s enterprise element but has previously indicated that their interpretation of a "separate existence" test has been satisfied, opting not to resolve the structure issue at this time.

The enterprise alleged in this case meets a stringent standard for establishing a separate organizational structure distinct from the racketeering activity, making it unnecessary to determine the appropriate interpretation of Turkette. Both interpretations recognize that the plaintiffs have adequately alleged the existence of two distinct enterprises. The majority interpretation, adopted here, stipulates that an organization must be separate from the racketeering activities it engages in, which aligns with the purpose of RICO to address "organized" crime. The minority approach is rejected for rendering the enterprise element redundant and diminishing the statute's focus on organized crime, which poses unique threats to legitimate business operations. The text references multiple cases and judicial opinions that support the majority interpretation and highlights the significance of maintaining the enterprise element within the RICO statutory framework.

Adopting the minority approach in RICO cases would allow conspiracy proof to meet the enterprise requirement of 18 U.S.C. § 1962(c), thereby making § 1962(d) a prohibition against conspiracies to conspire. This approach poses a risk of guilt by association, contrasting with the more limited nature of § 1962(d) compared to standard conspiracy laws under 18 U.S.C. § 371. RICO imposes harsher penalties and remedies, indicating it targets complex enterprises rather than mere conspiracies. The minority interpretation could simplify RICO to a tool for punishing repeat offenders, which contradicts Congressional intent, evident in the original RICO legislation’s provisions for increased penalties for recidivists. 

For RICO’s enterprise element, it is necessary to demonstrate an organization with a defined structure for decision-making, whether hierarchical or consensual. This structure must enable ongoing management of the group’s affairs, but does not require uniform decision-making or unrelated functions. The enterprise must exist beyond merely facilitating predicate acts. In reviewing the Appellants’ second amended complaint, the court determined that Appellants failed to specify an organization with adequate structure, as their allegations did not indicate a guiding authority or decision-making apparatus. Each Appellee acted independently in the alleged fraudulent activities, lacking a coordinated organizational structure.

The second amended complaint references a hierarchical relationship among Appellees, specifically indicating that the Gabryches directed Defendant Eddie Lin to solicit buyers after obtaining an option on property. Lin, under the Gabryches' direction, allegedly made misrepresentations about the property's value and sale potential. However, this statement does not sufficiently establish the existence of a distinct enterprise separate from the alleged predicate acts. It lacks evidence of a mechanism for ongoing control of the group’s affairs and does not show that the Gabryches guided Lin in his transactions. Instead, it suggests that the Gabryches formulated a plan for fraudulent transactions, implicating Lin in a conspiracy to commit racketeering acts. 

The complaint fails to demonstrate a decision-making structure or a separate mechanism for distributing transaction proceeds beyond standard real estate practices. The proceeds were allocated in a typical manner without any indication of using profits to fund further predicate acts or diverting funds through a management company. While the existence of a corporation can satisfy the enterprise requirement if it operates independently of the racketeering activities, in this case, George Realty does not fulfill that role, as it did not contribute to the operations of the alleged enterprise. The precedent set in Feldman, where corporations played a crucial part in both legal and illegal activities, does not apply here, as George Realty had no involvement in the purported enterprise's operations.

The second amended complaint implicated George Realty as part of an alleged enterprise but did not name it as a defendant or clarify its role within the enterprise, only mentioning that Eddie Lin was the real estate agent for George Realty. Appellants failed to allege that George Realty engaged in racketeering activities, protected the Appellees from liability, existed to benefit the Appellees, or facilitated fraudulent transactions. The complaint lacked assertions that George Realty itself constituted the enterprise or that the Gabryehes had control over it, which are necessary for a valid RICO claim. The court found that the Appellants did not present a distinct organization separate from the fraudulent activities, thus failing to establish an enterprise under RICO. Consequently, claims under 1962(c) and 1962(d) could not proceed. The district court had previously allowed one more amendment but noted specific requirements for a valid RICO allegation, which the Appellants did not meet. Therefore, the dismissal of the second amended complaint was upheld, and the court concluded that no further amendment would rectify the deficiencies. The court affirmed the dismissal without leave to amend, stating that the enterprise requirement is interpreted consistently in both civil and criminal RICO cases, with only the remedies differing.