Court: Court of Appeals for the Seventh Circuit; January 30, 2017; Federal Appellate Court
Allegations in the supplemental complaints suggest that the defendant law firms and lawyers were engaged in significant ethical violations. However, the critical issue is whether these complaints adequately claim violations under the Racketeer Influenced and Corrupt Organizations Act (RICO). The alleged violations pertain to Krakow Business Park Sp. z o.o. and its affiliates. The district court found that the plaintiffs were estopped from asserting certain claims and that the lawyer-defendants did not cross the line into RICO conspiracy involvement. The appellate court agreed with the district court's conclusion that the complaints failed to establish any federal claims, thus affirming the judgment.
This case is related to previous litigation involving shareholders of Krakow Business Park, specifically Domanus v. Lewicki, where a default judgment of $413 million was entered against certain shareholders for discovery abuses, based on plaintiffs' demonstrated damages of $137.8 million. The defaulting defendants contended that the damages determination should have been stayed until claims against non-defaulting defendants were resolved. The court noted that while they typically would stay such determinations to avoid inconsistent awards, the plaintiffs committed to dismissing claims against non-defaulting defendants if the judgment against the defaulting parties was upheld. This commitment leads to judicial estoppel, which is a key issue in the current appeal.
Key characters in the case include the plaintiffs, referred to collectively as Domanus (Jan Domanus, Andrew Kozlowski, and Krakow Business Park SP. z o.o., now bankrupt in Poland, along with its subsidiaries). The original defendants, known as the Swiech Group, consist of Adam Swiech, Richard Swiech, and Derek Lewicki, all shareholders in the Business Park. Supplemental defendants, identified as lawyer-defendants, include the Kubasiak Firm and several attorneys from Locke Lord LLP. Other actors involved are the Gordon firm, Richard Karr, and Polish lawyer Janusz Dlugopolski.
The litigation revolves around allegations that the Swiech Group engaged in a scheme to misappropriate the Business Park’s assets beginning in 1997, thereby diminishing its value and the shares owned by Domanus and Kozlowski. Actions taken included entering into fraudulent contracts, leasing office space at below-market rates, misappropriating significant land value, and receiving kickbacks from contractors. Some of the proceeds were allegedly funneled into businesses managed by the Swiech Group in the Chicago area. Adam Swiech reportedly reinvested stolen assets into the Business Park, further diluting Domanus's and Kozlowski's interests, and obstructed a sale of shares to Luxembourg firm Oreo.
In 2008, Adam Swiech was arrested on multiple charges, including money laundering and leading an organized crime ring, which led to his resignation from management positions. Despite this, he allegedly retained control through appointed proxies. He was convicted in 2014, with ongoing prosecutions noted at the case's filing. Richard Swiech and Lewicki also faced criminal charges in Poland related to the Business Park, though the outcomes of those charges are unclear.
The lawsuit in question stems from claims under RICO and state law filed by Domanus and Kozlowski against the Swiech Group. A prior default judgment against the Swiech Group, imposed as a discovery sanction, resolved their action, and the appeal was accepted with the understanding that they would dismiss claims against non-defaulting defendants, including Katarzyna Szuberfc-Lewicki and Bozena Sanecka-Swiech. Subsequent to the court's decision in Domanus I in February 2014, Domanus and Kozlowski filed Supplemental Complaints in August and November 2014 against Locke Lord and its attorneys, as well as the Kubasiak firm and Dienner. These complaints allege that the attorneys facilitated the RICO conspiracy and violated state law by representing both the Business Park and the Swiech Group, which created conflicts of interest.
Domanus claims that Dienner engaged in fraudulent billing, tricking the Business Park into paying for legal services provided to the Swiech Group, which was in opposition to the Business Park's interests. Allegations include violations of the "neutrality rule," where corporate insiders accused of disloyalty cannot defend themselves at the company's expense. Specific actions attributed to Dienner include consulting with Richard Karr from the Gordon firm while preparing legal motions and documents, as well as concealing the actual representation and billing practices by misrepresenting the nature of services rendered.
Dienner's involvement spanned from July 2010 to October 2011, after which Locke Lord took over representation until May 2012. Initially, Locke Lord also represented both entities but later recognized potential conflicts. Domanus alleges that Locke Lord engaged in deceptive practices, including billing for services benefiting the Swiech Group and attempting to intimidate Kozlowski, as well as concealing evidence related to the RICO conspiracy and facilitating a dilution of the Business Park's shares.
All lawyer-defendants' motions to dismiss the claims against them under Federal Rule of Civil Procedure 12(b)(6) were granted by the district court. The court determined that the plaintiffs had judicially estopped themselves from seeking damages that overlapped with those against the original defendants, due to their agreement to drop all claims against non-defaulting defendants in a prior case (Domanus I). The court rejected the notion that this agreement only applied to the parties involved in that lawsuit, as it could lead to inconsistent damage awards.
However, the court acknowledged the possibility of new direct claims and derivative claims that were not barred by judicial estoppel. Despite this, the court found that the case against the lawyer-defendants failed for other reasons. It reviewed the complaint and key documents and concluded there was no evidence of the lawyers' participation in a RICO conspiracy under 18 U.S.C. 1962(d). Domanus's theory required proof of the lawyers' agreement to participate in racketeering activity, which was not substantiated.
The court noted that mere knowledge of accusations or a large volume of documents that were not meaningfully reviewed did not equate to sufficient knowledge of the underlying allegations. Willful blindness was dismissed as a theory since the lawyers had valid reasons for not extensively reviewing the documents. The court opined that the lawyers merely provided legal services and that any ethical violations would be subject to disciplinary measures, not necessarily indicative of a RICO conspiracy.
Additionally, the court briefly mentioned other defenses raised by the lawyers, including the irrelevance of RICO to their actions in Poland, potential immunity under the Noerr-Pennington doctrine, and the inadequacy of the supplemental complaints in alleging causation. Ultimately, the court relinquished jurisdiction over the supplemental state-law claims and dismissed the case entirely.
Appellate jurisdiction is based on a certification under Rule 54(b) and 28 U.S.C. 1291. The district court resolved the claims of all plaintiffs (Domanus, Kozlowski, and the Business Park) against the lawyer-defendants but left unresolved the damages claims the Business Park has against the Swiech Group. The court determined that these claims are distinct from those involving the lawyers and found no just reason for delay in the appeal. Rule 54(b) allows for final judgment on fewer than all claims if there is no just reason for delay, which requires the resolved claim to address a distinct issue rather than overlapping with unresolved matters.
The appeal's timeliness is confirmed as it was filed within 30 days of the district court’s certification, and no claims remain against the lawyer-defendants. The key issue is whether the claims against the lawyers are separate from the claims against the original defendants; if they are part of a single conspiracy, it could raise finality concerns. The district court viewed the lawyers' actions as distinct from those of the original defendants related to an alleged conspiracy to loot the Business Park, which influences both jurisdiction and the appeal's merits. The appellate court ultimately agrees with the district court's delineation of issues, confirming jurisdiction under Rule 54(b) and proceeding to consider the merits of the appeal.
The district court dismissed the case for failure to state a claim, prompting a de novo review of the factual allegations in the supplemental complaints, which are accepted as true and construed in favor of the plaintiffs to determine if a plausible claim exists. The focus is on Domanus’s RICO conspiracy claim; if it is upheld, the supplemental claims will be reinstated. The absence of independent jurisdiction under the diversity statute is noted, as there may be Illinois citizens involved on both sides. Domanus alleges violations under RICO’s conspiracy subsection, which prohibits individuals associated with an enterprise from conducting its affairs through a pattern of racketeering activity or unlawful debt collection. To establish a RICO conspiracy, a plaintiff must demonstrate that the defendant agreed to participate in an enterprise’s affairs through racketeering activity and that at least two predicate acts would be committed by members of the conspiracy. The critical issue is whether the allegations support that the lawyer-defendants agreed to join a conspiracy allegedly orchestrated by the Swiech Group to misappropriate Business Park assets. This requires showing that each defendant was aware of the conspiracy's existence. The district court found the plaintiffs failed to adequately plead this awareness, even under the lenient Rule 12(b)(6) standard. The plaintiffs could potentially demonstrate knowledge through actual awareness or willful blindness, which will be examined further.
Actual knowledge can be established through both direct and circumstantial evidence, as stated in Ortiz v. Werner Enters., Inc., which does not prioritize one type over the other. Circumstantial evidence involves making inferences based on the surrounding circumstances, as noted in Washington v. LaPorte Cnty. Sheriff’s Dept. Domanus claims that Locke Lord was aware of a conspiracy because the defendants solicited their involvement in fraudulent activities, specifically taking money from the Business Park under false pretenses to benefit the Swiech Group. This claim is supported by allegations of questionable billing practices, where services for the Swiechs and Lewicki were hidden within invoices to extract funds from the Business Park.
However, merely having questionable billing practices does not suffice to prove that the lawyer-defendants had knowledge of the broader RICO conspiracy, which includes previous fraudulent activities. While conspirators need not know every detail of a scheme, they must understand its essential nature. The complaints fail to demonstrate that the lawyer-defendants were aware of the underlying fraudulent arrangements, focusing instead on potential misrepresentation of ethical obligations. Although Domanus referenced the Third Amended Complaint and statements from the Polish prosecutor to suggest the lawyer-defendants' knowledge, the district court emphasized that lawyers are not required to accept allegations as true when evaluating a case.
The D.C. Circuit's decision in RSM Prod. Corp. v. Freshfields Bruckhaus Deringer U.S. LLP illustrates a similar principle, where allegations based on news reports and a client's reputation were deemed insufficient to imply knowledge of wrongdoing. This reasoning applies in the current context, indicating that Domanus has not provided adequate evidence to support the claim that the lawyer-defendants knowingly participated in the alleged RICO conspiracy.
Domanus contends that the lawyer-defendants' observations and the allegations in the Third Amended Complaint, coupled with prosecutor statements, suggest they plausibly knew about a conspiracy. However, this raises issues of willful blindness rather than actual knowledge. While the billing scheme and the Swiech Group’s attempts to cover litigation costs are concerning, mere suspicion is insufficient to establish actual knowledge. The lawyers had no indication of the Swiech Group's misconduct prior to their engagement, failing to show any plausible connection to the conspiracy. Willful blindness requires a belief in a high probability of a fact and deliberate avoidance of that fact, as established in case law. Awareness of potential illegal activity does not equate to knowledge. A pivotal email from attorney Jaszczuk indicates he suspected some wrongdoing but opted not to conduct an exhaustive review of documents to save costs for the client, suggesting a strategic decision rather than willful blindness. The email does not imply that a thorough review would have uncovered conspiratorial evidence; it merely acknowledges that some transactions may not have been entirely legitimate and hints at possible complicity by the plaintiffs. Overall, the evidence presented does not satisfy the legal standards for establishing either actual knowledge or willful blindness in relation to the alleged conspiracy.
Supplemental complaints regarding the RICO conspiracy case are deficient in demonstrating both knowledge and agreement among the defendants. While allegations suggest that the Swiech Group and its attorney coordinated litigation activities and restructured billing, there is insufficient evidence to establish that the lawyer-defendants understood these actions as part of a conspiracy to defraud the Business Park. To support a claim under section 1962(d), plaintiffs must allege that the defendants agreed to participate in an enterprise and committed two predicate acts. The absence of either element is detrimental to the claim. Formal agreements are unnecessary if the actions of the alleged conspirators imply collaboration, but mere association with conspirators does not suffice to demonstrate an agreement. Claims involving lawyers conspiring with clients must show more than standard legal representation. The lawyer-defendants' actions can be explained by self-interest, such as generating revenue and satisfying clients, without indicating they were part of the alleged conspiracy. Although Domanus argues the lawyers acted on behalf of the client’s adversary, any agreement is not connected to the RICO conspiracy claimed. The alleged misconduct of the lawyer-defendants, while serious, falls outside the scope of the RICO conspiracy in question and should be addressed in another venue. The lawyer-defendants have also raised alternative arguments supporting the district court’s ruling, which, while acknowledged, need not be examined further.
The lawyer-defendants contend that the conspiracy alleged in these proceedings falls outside the territorial scope of RICO following the RJR Nabisco decision. They clarify that matters concerning the extraterritorial application of statutes pertain to the statute's reach rather than the court's jurisdiction. In RJR Nabisco, the Court determined that RICO’s substantive prohibitions can apply extraterritorially, but only if the predicate violations counter the presumption against extraterritoriality. Specifically, the Court ruled that there is no private right of action for injuries occurring outside the U.S. under 18 U.S.C. § 1962(c), but did not resolve whether the same applies to RICO’s conspiracy provision, § 1962(d), relevant in this case. It is suggested that pursuing a private right under § 1962(d) for foreign injuries may be challenging post-RJR Nabisco.
The court expresses reluctance to base its decision on judicial estoppel, acknowledging inconsistencies in the plaintiffs’ positions but noting that not all claims may be barred by it. The court opts to avoid this complexity, as some claims remain viable under the district court's perspective. Additionally, the court does not take a position on the applicability of the Noerr-Pennington doctrine to the lawyer-defendants' actions, which protects petitioning government activities under the First Amendment. The "sham" exception to this doctrine is acknowledged but is noted as difficult to substantiate.
Finally, the district court retains broad discretion over claims under its supplemental jurisdiction per 28 U.S.C. § 1367. Typically, when a case is dismissed under Rule 12(b)(6), jurisdiction over related claims is relinquished in favor of state or foreign courts. The district court chose this route in the current case, which is deemed within its discretion.
The court acknowledges the allegations made against the attorney defendants in the supplemental complaints but agrees with the district court's conclusion that the plaintiffs' claims do not warrant relief under RICO, thus ruling out federal court jurisdiction. While the plaintiffs assert a corporate neutrality rule applies to the defendants, the court highlights that the definition and scope of such a duty are not universally established in American corporate law, which typically falls under state law as governed by the internal affairs doctrine. It references the case CTS Corp. v. Dynamics Corp. of America to emphasize that state authority over domestic corporations is well-established. The court notes that Polish law would apply to the parties involved in the Business Park but criticizes the plaintiffs for failing to provide information on relevant Polish law, as required by Federal Rule of Civil Procedure 44.1. The judgment of the district court is affirmed.
